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The U.S. Treasury Bond Market is Melting [1]

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Date: 2025-04-11

In the long run, the stock market can be a valuable indicator of U.S. corporate wealth. In the short run, it can be all fun and memes, short squeezes, etc. I suspect a severe short squeeze was responsible for a big chunk of runup in stock prices after Trump eased tariffs on most countries other than China the other day.

But the bond and currency markets are not usually subject to whims and fads. U.S. Treasury Bonds and dollar exchange rates are serious business, at least they are supposed to be. Over the last couple days, the U.S. dollar and prices for longer-term U.S. Treasury bonds have fallen significantly.

So what then is happening in U.S. treasury and currency markets? In short, a crisis of confidence in the U.S. as an economic leader and trading partner, I think.

Before I explain, a disclaimer: I’m just an ordinary retired economist, not an expert in financial markets. So here are some links to corroborating opinions from folks more qualified:

CNBC: Fed’s Kashkari says rising bond yields, falling dollar show investors are moving on from the U.S.

Paul Krugman: The Third-Worlding of America

The chart above shows a gradual reduction in the 10-Year U.S. Treasury bond yield, basically since mid-February, when weakening economic data and consumer confidence reports started to filter in. This is normal — usually if the economy is trending weaker than expected, bond yields will fall, as investors nudge their expectations toward lower future inflation.

Then, a week or so ago, as Trump’s tariff insanity started to get real, and the stock markets crashed, U.S. bond yields fell further. Again, this is pretty normal in a crisis for investors to seek safe haven in U.S. treasuries when prices of riskier investments are falling.

However, over the last several days, something weird has happened: U.S. T-Bond yields have soared (and the prices of those bonds have fallen). At the same time, the U.S. dollar has fallen against the Euro and the Japanese Yen. Those are NOT normal reactions in times of economic and financial stress and volatility.

I think three four things are happening at once:

1. The Moron Factor, and higher long-term inflation expectations. The extraordinary stupidity of Trump’s Round 1 tariff announcement — penquins? — illustrated that morons are now in charge of U.S. economic policy. Morons being in charge of any nation’s economy are bad news — things tend to go poorly. In particular, moronic economic policy tends to increase sovereign debt and inflate its way out of that debt. I think investors may be starting to worry that the morons will find a way to weaken the Fed’s ability to keep inflation down over the long run. When morons are in charge, independent agencies have less protection to do their jobs.

While consumers are predicting higher short-term inflation due to tariffs, I think global investors are starting to worry also about the potential for longer-term inflation as well, with morons in charge. Here is a link to today’s news on falling consumer confidence and increasing inflation expectations. I can’t document a trend toward longer-term inflation expectations so easily, but I think it’s starting.

2. The Pure Idiot Factor, and worries about U.S. debt default. We don’t usually talk about the U.S. debt limit and the potential for default, because a default would be economically catastrophic, and we always seem to pay our bills on time in the end. But with pure idiots in charge, who knows? Even if we think the probability of an idiotic political crisis in the U.S. that pushed the brinksmanship too close to default had increased only from 0.01% to 0.05%, that’s still an alarming increase in the expected value of a default! I personally don’t believe the U.S. would default on our bonds, ever. But, yeah, with monkeys running the nuke plant, it’s suddenly not outside the realm of thinkability.

3. The Revenge Factor, as Chinese and European money managers, government or private, back away from U.S treasuries as a store of wealth. This could be both a rational and an emotional decision. A stronger currency makes a country wealthier — you can buy more stuff from others — but it also makes a country’s exports more expensive for others to buy. Stronger or weaker currencies are not necessarily good or bad, it depends on the circumstances.

But in April 2025, a weakening U.S. currency is probably a symbol that the U.S. dollar may no longer dominate global trade. I think the U.S. has benefited greatly from being thought of as the most stable, dominant currency for trading and storing wealth. Maybe not so much now?

[UPDATE — thanks to tjlord in the comments]

4. Higher Than Expected U.S. Budget Deficits, particularly as the U.S. weakens protections against fraud and tax evasion. I suspect markets have mostly factored in the likelihood that Republicans will be able to pass a tax bill that extends the Trump tax cuts, which mostly accrued to corporations and rich people. However, as I think about it, the recent cuts to the IRS’s auditing capability, and to the DOJ’s anti-fraud enforcement efforts, probably do imply higher-than-expected U.S. budget deficits. This didn’t happen just in the last week, like the sudden increase in bond yields and fall in the dollar, but it is probably a longer-term factor in reduced global confidence and higher expectations of U.S. fiscal mismanagement.

These are weird times. What are your thoughts? I’ll check the comments and make corrections best I can this afternoon.

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