Something very fishy was going on in the bond market. And not just fishy— potentially destructive for the federal government and US economy.
For the past several days, US government bond yields have been surging at a rate not seen since at least 2008. And in some cases not since the early 1980s.
And this is a very, very big deal.
Higher bond yields not only mean that consumer interest rates (like mortgages) become more expensive. But they also dramatically increase the government’s borrowing costs.
Bear in mind, the US government is already spending $1.1 trillion per year, just to pay interest on its $36 trillion national debt. That’s 22% of all US tax revenue, i.e. twenty-two cents out of every tax dollar collected go to pay interest on the national debt.
(Plus another 47c out of every tax dollar go to Social Security and Medicare. And that’s before you get to other mandatory entitlements like Medicaid, food stamps, and more…)
That annual interest payment is rising quickly; the government has roughly $10 trillion worth of debt this year to either finance, or refinance, which could easily result in hundreds of billions of dollars in additional interest expense each year.
So higher interest rates are a very big deal for a debt junkie like Uncle Sam.
That’s why it’s so alarming that bond yields are rising so quickly.
There’s realistically only a few ways this could happen.
One way that yields might have risen so quickly, which I suggested yesterday, is that big Wall Street firms could have been shorting the Treasury market, causing bond yields to rise.
Possible, yes. But not super likely.
Many of those big Wall Street investors might have feared retaliation by the Trump administration. Or that, at a minimum, the President would single them out in social media, creating a lot of complications for their personal lives and businesses.
But I think we can safely take this possibility off the table; given yesterday’s furious stock rally in which markets surged, any Wall Street firm shorting the bond market would have closed out its short positions and piled back into the stock market.
In other words, the trend of rising bond yields would have ended yesterday afternoon.
But that didn’t happen. Bond yields continued rising and are up again today.
The US government’s 30-year bond has been especially hard-hit and is up another another few basis points today, notching an astonishing 50-basis point (0.5%) increase in just a few days.
So with Wall Street busy trading the stock market, that only leaves a handful of possibilities.
It’s also unlikely that big banks (JP Morgan, Citi, etc.) would have dumped their US government bonds, because they have regulatory constraints in terms of what types of assets they are allowed to hold.
Plus any major selling of bank-owned Treasury bonds would have resulted in significant increases to bank reserves on the Fed’s balance sheet— and that doesn’t seem to have happened.
So at this point the most likely culprit is some disgruntled foreign country, whose government or central bank wanted to lash out and punish the US government over the tariffs.
Two or three days ago that could have been anyone. France. Germany. Japan. Etc.
But after yesterday’s announcement which paused tariffs for almost the entire planet, there’s only one suspect: China.
After the tariff pause, there wouldn’t be any point for the European Central Bank or German government to sell its Treasury bonds. Why risk Donald Trump’s wrath when a deal is at hand?
China, on the other hand, is stuck with a 100%+ tariff. So they definitely still have an ax to grind.
The concept of “face” (mianzi) runs very deeply in China; this is the idea that every individual, business, and even the government must uphold a reputation for strength. It would be culturally unthinkable for the Chinese government to accept tariffs without responding aggressively.
Dumping a portion of their vast US Treasury holdings is an easy way to send a message to Washington: “we can hurt you too.”
If I’m right, it means this trade dispute has now graduated to full-blown economic warfare. And we could see some pretty rapid escalation.
For example, if China keeps dumping its Treasury bonds (and hence raising US interest rates), I wouldn’t be surprised to see the US administration sanction the CCP and Chinese central bank, essentially freezing the bonds that they own and preventing any further sales.
China could escalate with export controls over vital rare earth minerals, which are essential in the electronics industry.
Then there’s the possibility that each government could expropriate foreign-owned assets, i.e. US business operations in China, or Chinese investments in the US.
Then would come the cyberattacks, and more.
We can hope for cooler heads to prevail. But history is full of examples of how economic warfare can very quickly spiral out of control and escalate into much larger conflicts. And, at the moment, that seems to be the direction that this is heading.
