investors react to new reciprocal tariffs

The 10-year Treasury yield retreated from its highs of the day after a successful bond auction eased concerns about demand for U.S. debt.

The bond market — not a plunging stock market — has been the talk of Wall Street with prices tumbling and yields spiking, unusual action during times when fears of a recession are growing and fixed income is usually relied on as a safe haven from turmoil elsewhere.

But yields were backing off the highs Wednesday afternoon. A 90-day pause in some tariffs announced by President Donald Trump helped to eased some mounting worries in the fixed income market.

The 10-year Treasury note yield was last up 5 basis points to 4.31% after climbing overnight above 4.51%. As recently as last week, the 10-year yield, which helps decide rates on mortgages, credit card debt and auto loans, was below 3.9%.

The 30-year Treasury bond yield hit a high of 5.02% overnight, a level not seen since November 2023. It was last at 4.715%. The 2-year Treasury yield rose nearly 17 basis points to 3.908%, jumping in afternoon trading. The upward move for short-term yields could be a sign that traders think the tariff pause will make the Federal Reserve less likely to cut rates at its upcoming meetings.

One basis point is equivalent to 0.01%. Yields and prices move in opposite directions.

The bid-cover ratio for the auction of $39 billion in 10-year Treasurys was 2.67, much higher than the prior 10-year auction, indicating strong demand. So-called indirects accounted for more than 87% of the bids, signaling solid demand from holders such as foreign investors.

The 10-year yield has rebounded beyond where it was the day before Trump’s tariff plan was unveiled last Wednesday and is currently at the highest since February. Trump’s next set of tariffs kicked in overnight, sending the rate on goods imported from China to 104%. China then retaliated early Wednesday, further embroiling the globe in trade turmoil. Trump on Wednesday hiked tariffs on China again to 125%.

The White House trade fight with the rest of the world has driven equity prices lower, with the S&P 500 losing 12% in just four trading days amid growing worries the president’s policies are helping to trigger a recession.

A market sell-off and rising concern that the economy is headed for a downturn would normally cause investors to flee toward bonds in a search for safety, driving yields lower. But that hasn’t happened.

The iShares 20+ year Treasury Bond ETF (TLT), a proxy for long-term bond prices, is down more than 4% this week.

“Perhaps even more alarmingly, U.S. Treasury markets are also experiencing an incredibly aggressive selloff as we go to press, adding to the evidence that they’re losing their traditional haven status,” Henry Allen, a macroeconomic strategist at Deutsche Bank, said in a note.

China and Japan selling?

Traders are looking at a number of theories to explain the move in bonds, ranging from forced selling by hedge funds getting margin calls to more troubling speculation of foreign holders dumping U.S. government securities.

The largest holders of Treasurys are Japan, China and the U.K., the very countries the U.S. has targeted with some of the highest tariffs.

“This is a trade war and if countries can use their stock of U.S. financial assets that they’ve accumulated … then they can create some problems,” said David Zervos, chief market strategist at Jefferies, on CNBC’s “Worldwide Exchange” Wednesday.

Wednesday’s auction showed they were not using this so-called nuclear option yet. But countries may have no choice but to own fewer U.S. government bonds if Trump is successful in shrinking the U.S. trade deficit, as that will result in Americans sending less money overseas to pay for goods. That means fewer dollars for countries to buy Treasuries.

Backfiring on White House

The move higher in yields is trouble for both the Trump administration and the Fed. The White House for a time could have taken solace that the tumultuous tariff rollout was at least lowering rates, providing a buffer for consumers. But then rates rebounded this week.

“Trump administration officials have been taking credit for the recent drop in bond yields and mortgage interest rates,” wrote Ed Yardeni of Yardeni Research in a note Tuesday evening. “Unfortunately, the 10-year Treasury bond yield is up.”

“Why is this happening? Fixed-income investors may be starting to worry that the Chinese and other foreigners might start selling their U.S. Treasuries,” added Yardeni.

Meanwhile, the Fed may be hesitant to cut official lending rates, currently at 4.25% to 4.50% for fed funds, if tariffs around the world boost inflation. Its hand may be forced if rates continue to spike and recession fears grow.

Even so, while a rate cut would affect short-term rates, it could backfire and fuel a bigger spike in long-term rates that are decided in the open market, as traders speculate a looser Fed will lead to even more inflation over the long term.

Trump said at the White House Wednesday afternoon that he did not issue the tariff pause because of markets but that he had noticed the rise in yields overnight.

“I was watching the bond market — the bond market is very tricky. But if you look at it right now it’s beautiful. The bond market right now is beautiful, but yeah I saw last night where people were getting a little queasy,” Trump said.

— With reporting by Sawdah Bhaimiya.