Back on April 9th after almost a week of utter chaos in the markets Donald Trump announced a 90 day pause on the introduction of so-called reciprocal tariffs. The clock has been ticking for 13 days since that news, and we don’t seem to be any further forward in sorting the mess out.
Indeed President Trump has opened up a new front war of words against Federal Reserve chair Jerome Powell.
Mr Trump hasn’t minced his words and has made it very clear that he wants chair Powell gone and interest rates lower.
Alternative facts
As is the case with many of the President’s utterances there is just one small problem and that is it’s not within the President's power to unilaterally remove Jerome Powell, or to control US interest rates.
Simply because the Federal Reserve is an independent central bank and is deliberately set up to operate at arms length from the central government.
However the truth, or the facts of the matter, aren’t at a premium in Washington DC right now.
And Mr Trump is likely to carry on Fed bashing in the coming days and weeks.
Bond markets
That is of course unless he gets reined in once more, by the all powerful bond markets.
After all, it was a sharp move higher, in the yields on long term US Government bonds that forced President Trump to introduce the 90 day tariff delay.
You see the yield on Govt bonds is effectively the cost that the US govt has to pay to borrow money, from the markets.
Money that the government needs for its day-to-day operations and more importantly to refinance its existing debt load, which is fast approaching $37.20 trillion.
The higher the yields move on US Government bonds the more expensive it becomes for the US government to borrow new money.
Bigger (risk) premiums
In these circumstances the bond market is said to be demanding a premium for further lending to the US.
The fees that the bond market demands are based on risk, and the likelihood of the borrower repaying the lender.
The riskier the loan, the higher the interest rate the market expects to receive.
Yields had been heading lower in line with interest rates. Though there was a hiatus in the dying days of the Biden administration, when US bond yields rose, as the central bank was talking down and even cutting interest rates, and then again ahead of the Christmas holidays.
US interest rate cuts are on hold for the moment, because of concerns about the return of inflation and the strength in the US labour market, and bond yields are rising once more.
The chart below shows the yield on 30-year US Treasury bonds dating back to the early 1990s.
As you can see the trend had been downward.
However that changed in the pandemic and the cost of borrowing for the US government, over the long term has been rising ever since.
US 30-Year Treasury Bond Yields
Source: Barchart.com
If we look at a 12 month chart of those 30-year bond yields, we can get a feel for the current situation and their direction of travel.
US 30-Year Treasury Bond Yields
Source: Barchart.com
Divergence
We also can't and shouldn't ignore our next chart, which plots 10-year US Treasury bond yields against the value of US dollar index. Effectively the US currency’s performance against a basket of currencies from its biggest trading partners.
Traditionally as US yields/interest rates rise, the dollar, would be expected to appreciate.
Because international risk capital flows to where it can receive the best returns.
Higher interest rates/yields should attract capital flows into the dollar and dollar assets.
However, that hasn't been the case in 2025, indeed the dollar index is lower by just over -9.00% year to date.
That suggests that markets, or some portion of them, no longer view the dollar as the safe haven it once was.
Which, given the turmoil the Trump administration has unleashed, is a reasonable view point in my opinion.
Let’s not forget that debt servicing, that’s the amount that the US will pay in interest on its outstanding debts, is forecast to rise to $952.0 billion this year.
US 10-Year Treasury Bond Yields vs Dollar Index
Source: Trading Economics
A new home in Europe?
Judging by the fall in German 10- year bond yields and the rise in the Euro, it’s tempting to think that some of that risk capital has made its way to Europe
Of course Germany is not without its own problems, but as I noted in the recent article Tariff Proof Stocks some German assets have been “bullet proof” this year, despite or because of the issues that confront Europe's biggest economy.
I was in discussion today about how this nightmare might end. Others in the conversation were of the opinion that if tariffs, and the trade war with China were abandoned, or put on hold indefinitely, then the turmoil could be downgraded from a typhoon to a storm in teacup.
However I am not convinced, I don't think the genie can be put back in the bottle.
Trust, or investor confidence in the US has been broken and that can’t be easily be repaired, if indeed it can be repaired at all.
I look at America in a completely different light now, and I am sure I am not alone in that.
Can it be trusted to keep its promises and honour its current and future obligations?
Not so long ago I would have answered yes, without hesitation, but now .................
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