By Dr. George Calhoun
Executive Director of the Hanlon Financial Systems Research Center at Stevens Institute of Technology
“The bond market is very tricky, I was watching it,” Trump told reporters. “I saw last night where people were getting a little queasy.” – CNN (April 9, 2025)
“Bond vigilantes were screaming” – Ed Yardeni (April 11)
“There is still trouble in the bond market.” – The Wall Street Journal (May 11)
Executive Summary
The Treasury Bond market went into convulsions last month following the “Liberation Day” announcement of broad new high-tariff policies (April 2). Because Treasurys play such an important role in the global financial system, it seemed briefly that the whole system might be on the verge of coming apart. The “queasiness” in the Treasury market was cited as the reason that tariff proposals were quickly put on hold (April 9). The markets recovered, and it seemed that the relationship between Cause (tariffs) and Effect (bond market turmoil) had been clearly demonstrated.
This is likely a false conclusion. For two reasons.
The first is scale. What was it – substantively – about the prospect of tariffs that so unsettled “the deepest and most liquid financial market in the world”? A market worth $29 trillion, equal to 98% of U.S. GDP?
Initial assessments focused on the presumed negative impact of a tariff “tax” on consumers, with the heightened possibility of a recession or inflation or both. But these analyses, however superficially plausible, become unconvincing on closer examination, for one simple reason: the projected impact on either inflation or growth is quite small relative to the economy (as detailed in the previous column). The Effect comes to seem disproportionate to the presumed cause.
Secondly, for several years the Treasury market has been behaving strangely, for reasons that have nothing to do with tariffs or trade policy.
The first three have to do with the yield curve, which describes the structure of interest rates (yields) in the Treasury market. An inverted yield curve is a sign of abnormal (and even illogical) market conditions where long-term Treasury debt pays less interest than short-term debt. Why should an investor receive less interest on a 30-year bond, exposed to many forms of risk over a very long period, than on a 90-day Treasury bill which for all practical purposes carries no risk whatsoever? But it happens and when it does an inversion is considered a very significant economic indicator, and an almost perfect predictor of recessions.