In a Nutshell: The Yippy

The tit-for-tat tariff war between President Trump and China hit a deep nerve in the Treasury market recently as trade war tensions were peaking, thereby sparking fears of inflation and economic instability following reports of overseas investors offloading U.S. Treasuries (a very scary scenario) due to ongoing concerns about the economy and a sharp sell-off in the U.S. dollar that hit its lowest level against the Swiss franc in a decade.

The greenback has shed 10% in the last three months, with nearly 5% of the loss coming in the past two weeks. In the currency world, this is a dramatic decline. The $28.6-trillion of the U.S. Treasury market is the lifeblood of the global financial system, and the dollar is the world’s reserve currency. Seeing the yield on the benchmark 10-year Treasury spike from 3.97% on last Monday’s opening to 4.49% at Friday’s close is just as dramatic, and not in a good way. The 30-year T-bond approached 5% before closing at 4.87%.

There were reports of forced selling from large institutional investors that had to unwind their leveraged positions, especially on the longer-dated maturities. The situation became so severe that President Trump paused the steepest tariffs for 90-days, hoping to stabilize markets. He used the term “yippy” to describe investor reactions, even as stock investors and nervous bond investors added more volatility to markets.

To call the fire sale selling in Treasuries a “yippy” moment is disingenuous and dangerous. There was a real risk in triggering systemic selling pressure. To add further angst to the President’s casual reaction, Treasury Secretary Scott Bessent publicly claimed that the 90-day pause on tariffs was part of Trump’s negotiation strategy from the beginning. Critics argued that the sudden reversal seemed more like damage control after market turmoil and public backlash as bond spreads gapped wider – not a “yippy” reaction.

Bond spreads – the cost to borrow – widened significantly, marking the biggest one-week increase since the 2023 regional banking crisis. This volatility was largely driven by uncertainty in the corporate bond market that led to rising borrowing costs on top of Chinese and other Asian funds offloading Treasuries in high volume. The takeaway is that Trump and Bessent have lost some credibility in bond trading pits.

Both the bond and stock markets have become trigger-happy in this highly fluid and unpredictable environment. It would only take a new headline, or headlines, of aggression from Trump, or a major trading partner fighting back hard, to cause the bond market, stock market, and the dollar to resume losing value. Even though bond prices have paused in their downward spiral, fund flows remain largely negative. After the recent panic sales, bond investors remain very unsure about all that has transpired in the Treasury market. Wall Street banks and investors have reported a decline in liquidity – the ease with which traders can buy or sell assets without affecting prices – as volatility in the Treasury market has intensified. During the 2020 coronavirus crisis, for instance, the central bank stepped in amid severe market dysfunction, when key funding markets froze due to concerns over the pandemic’s impact on the global economy. The same fears of a major slowing in global growth from tariffs has now emerged.

It is vital that Trump & Company restore confidence in the markets. Sleeping with one eye open is not how investors want to function. For the vast majority of investors, volatility is incredibly stressful and mentally exhausting to manage. Some real progress on trade and government spending must be accomplished, near term, to stem the outgoing tide of bond and stock assets flowing into money markets, and that time is now.