A week after Donald Trump shocked the world by imposing punitive tariffs on America's trading partners, he shocked it again today when he announced a ninety-day pause on the biggest duties against most countries"notably excepting China, among a handful of others"while leaving in place a ten-per-cent across-the-board levy.
The Administration tried to spin the midday move, which sent stocks rocketing upward, as an example of the President's dealmaking prowess, claiming that the tariffs had inspired new trade deals with many countries. But the reality seems to be that Trump caved in the face of alarming disruptions in the huge market for U.S. Treasury bonds, which the American government uses to finance itself.
Trump's announcement of his "reciprocal" tariffs last week, which weren't reciprocal at all, sent the markets into turmoil. The White House seemed to have steeled itself against an adverse reaction in the stock market, even as, by Wednesday morning, the total market had fallen by about twenty per cent from its high. What really spooked financial commentators"and Trump himself, as he conceded later on Wednesday, speaking outside the White House"was the turbulence in the bond market, where yields spiked on Monday and Tuesday.
A big sudden rise in bond yields equates to a big sudden fall in bond prices"which can be a sign that some financial institutions are in distress and being forced to sell at any price. On Tuesday, reports emerged that the source of this trouble might be the "basis trade," a process in which hedge funds borrow gobs of money to profit on the tiny differences in price between Treasuries and derivative securities, contracts designed to replicate the performance of these same Treasuries. When bond prices move unexpectedly, basis traders can face big losses and be subjected to margin calls, forcing them to raise cash by selling some of their portfolio. And that selloff, in turn, forces prices even lower.
It's not entirely clear that this was the actual cause of the rising yields in the bond market, but by this morning Lawrence Summers, a former Treasury Secretary, warned online that "developments in the last 24 hours suggest we may be headed for serious financial crisis wholly induced by US government tariff policy." The current Treasury Secretary, Scott Bessent, himself a former hedge-fund manager, initially shrugged off the threat. But by Wednesday afternoon Bessent was spinning the capitulation as best he could. Referring to Trump, he said, "It took great courage for him to stay the course."
If that was meant as an inside joke, Bessent didn't let on. More likely, he was trying to assuage his boss's bruised ego. In the end, the markets forced Trump to do something sensible"announce a timeout"but a lot of damage has already been done to 401(k) plans, business planning, consumer confidence, and faith in the U.S. government. None of these things will be repaired easily or quickly.
John Cassidy
Cassidy has been a New Yorker staff writer since 1995, and writes The Financial Page, a column about economics and politics.
