Donald Trump has finally blinked – but it’s not the stock markets that have forced him to act
Chalk this one up to the bond vigilantes.
This is the term used periodically to describe investors who push back against what are perceived to be irresponsible fiscal or monetary policies by selling government bonds, in the process pushing up yields, or implied borrowing costs.
Most of the focus on markets in the wake of Donald Trump’s imposition of tariffs on the rest of the world has, in the last week, been about the calamitous stock market reaction.
This was previously something that was assumed to have been taken seriously by Mr Trump.
During his first term in the White House, the president took the strength of US equities – in particular the S&P 500 – as being a barometer of the success, or otherwise, of his administration.
Donald Trump in the Oval Office today. Pic: Reuters
He had, over the last week, brushed off the sour equity market reaction to his tariffs as being akin to “medicine” that had to be taken to rectify what he perceived as harmful trade imbalances around the world.
But, as ever, it is the bond markets that have forced Mr Trump to blink – and, make no mistake, blink is what he has done.
To begin with, following the imposition of his tariffs – which were justified by some cockamamie mathematics and a spurious equation complete with Greek characters – bond prices rose as equities sold off.
That was not unusual: big sell-offs in equities, such as those seen in 1987 and in 2008, tend to be accompanied by rallies in bonds.
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What it’s like on the New York stock exchange floor
However, this week has seen something altogether different, with equities continuing to crater and US government bonds following suit.
At the beginning of the week yields on 10-year US Treasury bonds, traditionally seen as the safest of safe haven investments, were at 4.00%.
By early yesterday, they had risen to 4.51%, a huge jump by the standards of most investors. This is important.
The 10-year yield helps determine the interest rate on a whole clutch of financial products important to ordinary Americans, including mortgages, car loans and credit card borrowing.
By pushing up the yield on such a security, the bond investors were doing their stuff. It is not over-egging things to say that this was something akin to what Liz Truss and Kwasi Kwarteng experienced when the latter unveiled his mini-budget in October 2022.
And, as with the aftermath to that event, the violent reaction in bonds was caused by forced selling.
Now part of the selling appears to have been down to investors concluding, probably rightly, that Mr Trump’s tariffs would inject a big dose of inflation into the US economy – and inflation is the enemy of all bond investors.
Part of it appears to be due to the fact the US Treasury had on Tuesday suffered the weakest demand in nearly 18 months for $58bn worth of three-year bonds that it was trying to sell.
But in this particular case, the selling appears to have been primarily due to investors, chiefly hedge funds, unwinding what are known as ‘basis trades’ – in simple terms a strategy used to profit from the difference between a bond priced at, say, $100 and a futures contract for that same bond priced at, say, $105.
In ordinary circumstances, a hedge fund might buy the bond at $100 and sell the futures contract at $105 and make a profit when the two prices converge, in what is normally a relatively risk-free trade.
So risk-free, in fact, that hedge funds will ‘leverage’ – or borrow heavily – themselves to maximise potential returns.
The sudden and violent fall in US Treasuries this week reflected the fact that hedge funds were having to close those trades by selling Treasuries.
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Confronted by a potential hike in borrowing costs for millions of American homeowners, consumers and businesses, the White House has decided to rein back its tariffs, rightly so.
It was immediately rewarded by a spectacular rally in equity markets – the Nasdaq enjoyed its second-best-ever day, and its best since 2001, while the S&P 500 enjoyed its third-best session since World War Two – and by a rally in US Treasuries.
The influential Wall Street investment bank Goldman Sachs immediately trimmed its forecast of the probability of a US recession this year from 65% to 45%.
Of course, Mr Trump will not admit he has blinked, claiming last night some investors had got “a little bit yippy, a little bit afraid”.
And it is perfectly possible that markets face more volatile days ahead: the spectre of Mr Trump’s tariffs being reinstated 90 days from now still looms and a full-blown trade war between the US and China is now raging.
But Mr Trump has blinked. The bond vigilantes have brought him to heel. This president, who by his aggressive use of emergency executive powers had appeared to be more powerful than any of his predecessors, will never seem quite so powerful again.
Donald Trump could meet Vladimir Putin in person as early as next week to discuss a ceasefire in Ukraine, a White House official has said.
They said the meeting would be conditional on the Russian president meeting his Ukrainian counterpart Volodymyr Zelenskyy, Sky News’s US partner network NBC News reported.
It came days before the White House’s deadline for Russia to reach a peace deal with Ukraine or face severe economic penalties, which could also target countries buying its oil.
Asked during a news conference at the White House if the talks would take place, Mr Trump said: “There’s a very good prospect that they will.”
He said it had not been determined where the talks would take place, but added: “We had some very good talks with President Putin today.”
However, he said: “I’ve been disappointed before with this one.”
Asked if Mr Putin made any kind of concession to lead to the development, Mr Trump did not give much away, but added: “We’ve been working on this a long time. There are thousands of young people dying, mostly soldiers, but also, you know, missiles being hit into Kyiv and other places.”
More tariffs ‘could happen’
Mr Trump also said he could announce further tariffs on China similar to the 25% he announced on India over its purchases of Russian oil.
“Could happen,” he said, after saying he expected to announce more secondary sanctions intended to pressure Russia into ending its war with Ukraine.
Earlier, he imposed an additional 25% tariff on Indian goods, on top of a previous 25% tariff, over its continued purchases of Russian oil.
India’s foreign ministry spokesperson said the additional tariffs were “unfair, unjustified and unreasonable”.
Vladimir Putin welcomes Steve Witkoff during a meeting in Moscow. Pic: Sputnik/Reuters
It came after Mr Putin held talks with Mr Trump‘s special envoy Steve Witkoff in Moscow, with the meeting lasting around three hours.
In a post on Truth Social, Mr Trump said Mr Witkoff “had a highly productive meeting” with Mr Putin in which “great progress was made”.
He said he had updated America’s European allies, and they will work towards an end to the Russia-Ukraine war “in the days and weeks to come”.
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Correspondents in Washington and Moscow break down a busy day of diplomacy
‘The war must end’
Mr Zelenskyy later said he and Mr Trump spoke on the phone after the meeting. He said “European leaders also participated in the conversation” and “we discussed what was said in Moscow”.
He added: “Our common position with our partners is absolutely clear: The war must end. We all need lasting and reliable peace. Russia must end the war that it started.”
Mr Zelenskyy later said: “It seems that Russia is now more inclined to agree to a ceasefire.”
He added that the pressure on Moscow “is working”, without elaborating, and stressed it was important to make sure Russia does not “deceive us or the United States” when it comes to “the details” of a potential agreement.
America’s vaccine-sceptic health secretary has announced $500m (£375.8m) worth of cuts to their development in the country.
The US health department is cancelling contracts and pulling funding for jabs to fight viruses like COVID-19 and the flu, it was announced on Tuesday.
Robert F Kennedy Jr, known as RFK Jr, said 22 projects developing mRNA vaccines will be halted. It is the latest in a series of decisions to reduce US vaccine programmes.
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The health secretary has fired the panel that makes vaccine recommendations, reduced recommendations for COVID-19 shots, and refused to endorse vaccines despite a worsening measles outbreak.
RFK Jr claims the US will now prioritise “safer, broader vaccine strategies, like whole-virus vaccines and novel platforms that don’t collapse when viruses mutate”.
Responding to the announcement of cuts, Mike Osterholm, a University of Minnesota expert on infectious diseases and pandemic preparations, said: “I don’t think I’ve seen a more dangerous decision in public health in my 50 years in the business.”
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Dr Paul Offit, a vaccine expert at Children’s Hospital of Philadelphia, said RFK Jr’s move was short-sighted and that mRNA vaccines “certainly saved millions of lives”, including during the pandemic.
MRNA vaccines work by delivering a snippet of genetic code into the body that triggers an immune response, rather than introducing a real version of the virus.
According to the UK Health Security Agency, the “leading advantage of mRNA vaccines is that they can be designed and produced more quickly than traditional vaccines”.
Moderna, which was studying a combo mRNA shot that can tackle COVID and flu for the US health department, previously said it believed mRNA could speed up production of flu jabs compared with traditional vaccines.
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A COVID-19 vaccine during the pandemic. File pic: PA
Scientists are also exploring how mRNA could be used in cancer immunotherapies and in other illnesses.
At the White House earlier this year, billionaire tech entrepreneur Larry Ellison praised mRNA for its potential to treat cancer.
RFK Jr touts ‘effective’ alternative
The health department said the abandoned mRNA projects signal a “shift in vaccine development priorities.”
“Let me be absolutely clear, HHS supports safe, effective vaccines for every American who wants them,” Mr Kennedy said in a statement.
Later, he said work is underway on an alternative – a “universal vaccine” that mimics “natural immunity”.
“It could be effective – we believe it’s going to be effective – against not only coronaviruses, but also flu,” he said.
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