How Bond Vigilantes Made Trump Blink

Key Concepts:

• US Treasury Bonds: Debt securities issued by the US government. Traditionally considered safe havens during economic crises.
• Yields: The return an investor receives on a bond, expressed as a percentage of the bond's price. Yields and bond prices have an inverse relationship.
• Basis Points: A unit of measure used in finance, equal to 0.01% (one-hundredth of one percent).
• Bond Vigilantes: Investors in the bond market who sell bonds in response to government policies they perceive as inflationary or fiscally irresponsible, thereby driving up yields and potentially forcing the government to change course.
• Tariffs: Taxes imposed on imported goods.

The Role of Bond Vigilantes in Shaping Policy

1. US Treasury Bonds as Safe Havens (Normally):

• Traditionally, US Treasury bonds act as financial safe havens during economic crises. Investors flock to them for security, driving up their prices and lowering their yields.

2. The Anomaly: Treasury Bonds at the Heart of the Selloff:

• During a specific economic period (implied to be during the Trump administration), US Treasury bonds were not safe havens. Instead, they were at the "heart of the selloff." This means investors were selling off US Treasury bonds.
• This selloff caused yields (interest rates demanded by investors to buy government debt) to increase.

3. Skyrocketing Yields:

• Yields on 10-year US Treasuries "skyrocketed 49 basis points in one week." This was described as "the most in more than two decades," highlighting the unusual severity of the yield increase.

4. Bond Market's Assessment of Trump's Tariffs:

• The bond market's reaction (the selloff and subsequent yield increase) was interpreted as a message related to Trump's tariffs.
• The message: "We're not sure we're safe leaving our money in the US anymore." This suggests the bond market perceived the tariffs as a risk to the US economy.

5. Trump's Initial Resistance and the Bond Market's Influence:

• Initially, Trump was unmoved by "trillions of dollars of lost value in equity markets" and "the chorus of alarm from world leaders."
• However, the bond market's reaction did get his attention. The quote "I was watching the bond market. The bond market is very tricky. I was watching it" illustrates Trump's awareness of the bond market's influence.
• The bond market's reaction is credited with causing Trump to "press pause on his tariffs."

6. Who are the Bond Vigilantes?

• The video poses the question: "So who are these bond vigilantes?" This implies that the bond market's reaction was driven by investors acting as "bond vigilantes."
• The video highlights the significant role these "bond vigilantes" play in "shaping policy."

7. Conclusion:

• The main takeaway is that the bond market, specifically investors acting as "bond vigilantes," can exert significant influence on government policy. By selling off bonds in response to policies they deem risky, they can drive up yields and force policymakers to reconsider their actions. The example of Trump's tariffs demonstrates this influence.