On April 2, President Trump introduced a significant tariff plan, likely anticipating negative reactions from the stock market, which indeed followed. The Standard & Poor’s 500 Index experienced a sharp decline, falling by 597 points, or 10.5%, over the subsequent two days, marking its largest two-day point loss since late 2007, exceeding the drop during the eruption of the COVID-19 pandemic in 2020.
While many Americans were focused on the drastic market decline, the bond market also responded, albeit slightly later. The 10-year Treasury yield initially fell in line with stocks on April 3 and April 4. However, it then started an upward trajectory, rising from 4.009% on Friday to 4.177% on Monday, and further to 4.304% on Tuesday. By early Wednesday, the yield had surged above 4.5%, a notable increase that President Trump acknowledged.
In response, President Trump announced a 90-day suspension of most tariffs imposed the previous week, prompting a substantial relief rally in stocks on Wednesday and again on Friday. Despite this, the 10-year yield continued its rise, approaching 4.6% before settling at 4.5% on Friday. This yield increase had notable effects; for instance, one measure of 30-year mortgage rates increased from 6.6% to 7.1%, raising monthly payments on a $250,000, 30-year fixed-rate mortgage from $1,597 to $1,675, a 4.9% rise.
The future remains uncertain, despite the market recovery by Friday, with bond yields also rebounding. Market reactions over the following weeks and the next 90 days remain to be seen, as tensions in the trade dispute between the United States and China persist. The situation eased somewhat following the Trump Administration’s decision to exempt the most severe tariffs on smartphones, computers, and semiconductors manufactured in China. This relief benefited companies like Apple, which saw a 4.1% stock increase, and Nvidia, which rose 3.1%.
The United States has imposed 145% tariffs on Chinese goods, with China retaliating with 125% tariffs on U.S. imports. While this trade conflict has significant implications, the bond market’s role as a determinant of money’s cost remains crucial, as its discontent in recent weeks demonstrates.
Bond markets typically operate quietly, with transactions conducted between investors like pension funds and insurance companies and clients such as governments and corporations seeking capital for development projects. Over the bond’s term, clients provide predetermined returns, repaying or refinancing the bond’s face amount at maturity. This substantial market, valued at $140.7 trillion at the end of 2023, significantly impacts economies worldwide, dwarfing the global equity market’s value of $115 trillion, as reported by the Securities Industry and Financial Markets Association (SIFMA).
The Trump tariff initiative received criticism from various quarters, including conservatives and media outlets like The Wall Street Journal. The stock market’s initial crash and subsequent bond market reaction, characterized by selling U.S. treasuries and pushing yields higher, demonstrated the plan’s polarizing effects.
The identities of those selling U.S. treasuries remain private, yet the impact is evident. Selling pressure on U.S. securities could escalate, given concerns that America’s predictability and safety as an investment destination are diminishing.
A significant economic lever lies in the hands of international investors, who own $8.5 trillion in U.S. treasury securities. Prominent holders include Japan with $1 trillion, China with $760.8 billion, and the United Kingdom with $740.2 billion. More aggressive selling from these holders could cause significant market disruptions.
Another vulnerable market is the mortgage sector, where lenders provide homeowners with loans, funded by selling bonds designated for housing. CNBC’s Diana Olick reported that outstanding mortgage securities total $1.32 trillion, with 15% under foreign ownership. Given that Japan and China have begun reducing their holdings, any decision to divest further could considerably impact the mortgage market.
