Bond market "rides a roller coaster"! Trump's suspension of tariffs triggers significant volatility in US bond yields.

Although President Trump on Wednesday described the bond market as "amazing," it was a day of total chaos for U.S. bond traders. At the opening on Wednesday, as the stock market and U.S. bonds continued to suffer from selling for several days, concerns about the stability of the world's largest bond market grew. However, the situation changed abruptly in the afternoon. Trump announced a suspension of "equivalent tariffs" on most countries, causing market sentiment to shift instantly from risk aversion to risk appetite. This policy "emergency brake" triggered intense volatility in the bond market. The yield on the sensitive 2-year U.S. Treasury bonds surged by 30 basis points at one point during trading, marking the largest intraday increase since 2009, as traders reduced their bets on a Fed rate cut. The market currently expects the Fed to cut interest rates three times before the end of the year, down from the earlier expectation of four times. Meanwhile, the yield on the 30-year U.S. Treasury bonds erased previous gains, partly due to a reduction in concerns about inflation sparked by tariff escalation. After reaching a high of 5.02% in 2023, the yield briefly fell to a low of 4.7%. This volatility quickly spread to Asian markets as well. Short-term Australian bond yields recorded their largest increase in nearly three years, while the New Zealand bond yield curve flattened significantly. The surge in the bond market, along with the sharp rise in U.S. and emerging markets stocks, reflects a potentially brighter economic outlook. But for U.S. bonds, this means that pressure has shifted from one term to another. Zachary Griffiths, head of investment-grade and macro strategy at CreditSights, said, "This is an unsolvable market for U.S. bonds, either traditional 'risk appetite' pushing yields higher, or 'risk aversion' triggered by the trade war leading to foreign selling or basis trades dismantling, also pushing yields higher." Before the market reversal, sentiment in the bond market was extremely pessimistic, with many speculating that investors were unwinding leveraged bond positions. Trump seemed to acknowledge this in his speech on Wednesday afternoon. He said, "I saw people were a little bit nervous last night. I was watching, but now you look, it's beautiful." The recent surge in U.S. bond yields contrasts sharply with the bond rally that followed Trump's announcement of wide-ranging equivalent tariffs on April 2. This round of yield changes has been mainly concentrated in long-term U.S. bonds, partly reflecting market expectations that tariffs could lead to inflationary global trade wars. However, the volatility in the bond market is also showing a self-reinforcing trend - severe losses leading investors to flee popular trades. Many traders had previously bet that U.S. bonds would outperform the interest rate swap market, expecting the Trump administration to provide more favorable regulatory treatment. As "inflation trades" took over, these positions were forced to be abandoned, leading to a historical improvement in the relative performance of the swap market. Sean Simko, head of global fixed income portfolio management at SEI Investments, said Trump's current "softening" stance on tariffs - even if temporary - "gives the Fed more time to observe inflation trends." He said, "This is an optimistic interpretation. Time will tell whether this is just a pause, or whether it signifies positive negotiations progress and thus reduces global trading costs." Additionally, less than an hour before Trump's speech, a $39 billion 10-year U.S. bond auction showed good demand - despite some concerns from market participants that Trump's policies could dampen foreign buyers' interest. The performance of this auction was better than the 3-year U.S. bond auction on Tuesday, and bodes well for the 30-year U.S. bond auction on Thursday. Subadra Rajappa, fixed income strategist at Societe Generale, said, "This has indeed alleviated some market concerns." After the U.S. bond auction and Trump's latest tariff measures, the U.S. dollar continued to weaken on the same day. The Australian dollar, Brazilian real, and Mexican peso all rose by at least 3% against the dollar. The Vanguard FTSE Emerging Markets ETF (VWO) surged by 6.5%, marking its largest single-day increase since March 2022. Brendan McKenna, foreign exchange strategist at Wells Fargo, said, "Even if temporary, Trump's 'blink' and tariff reduction should significantly boost investor sentiment." He expects this to provide support to emerging market assets.