To borrow an old joke from President Donald Trump's first term: Welcome to the resistance, bond traders.
The financial professionals who buy and sell U.S. Treasury bonds for major investors on the secondary market helped force the president to back down from imposing a disastrous set of tariffs on almost every country in the world.
It was a refreshing reminder that checks and balances can still work, even if they aren't the ones described in your civics class.
Trump confirmed Wednesday that bond traders were at least partially behind the reversal, telling reporters that he had been watching the bond market and saw that investors were "getting a little queasy." Wall Street also gave them credit. "The Bond Vigilantes have struck again," market researcher Ed Yardeni wrote. A reporter for the Financial Times even offered an apology for having doubted the bond traders earlier.
To be clear, bond traders aren't some shadowy cabal trying to take down the Trump presidency. They're just a bunch of quants responding to market conditions as they try to figure out how to make their clients slightly richer that day. But at a time when so many other institutional actors — from white-shoe lawyers to university presidents — are failing at their jobs, it was nice to see.
A key check on Trump's financially illiterate plan to roll back 20th century economics turned out to be the simple 10-year Treasury bond.
As it turned out, a key check on Trump's financially illiterate plan to roll back 20th century economics turned out to be the simple 10-year Treasury bond.
The federal government issues these bonds four times a year, with interest rates set by how much buyers are willing to bid at an auction. That rate is an important benchmark that affects how much you pay each month on everything from your credit card bill to your car loan to your mortgage.
That's why it was so important when bond traders started, in Trump's words, "getting a bit yippy."
The bond market typically rises and falls opposite the stock market. When stocks are rising, investors prefer to get a higher return there. But when stocks start to fall, they return to the safe-but-boring returns on Treasury bonds. So when the stock market got spooked by Trump's tariff plans, there should have been more investors looking to buy bonds.
But that didn't happen. This week, investors started selling off bonds to the point where some analysts were even wondering if the Federal Reserve might have to step in, as it did during the coronavirus pandemic and the global financial crisis of 2008. As one reporter at the Financial Times put it, it's "not a good thing when a market that is supposed to be the ultimate safe port in a storm is suffering from its own tempest."
It's always hard to say exactly what happened. Large hedge funds may have realized that they were holding onto too much in bonds based on a bad guess on how Trump would act as president. Foreign investors might have been nervous about the stability of the U.S. government and looking to put their money somewhere else. Or the so-called "bond vigilantes" may have been sending a warning shot over the White House's erratic economic planning.
But regardless of the cause, the tanking bond market shook Trump.
This came after a week in which the president was not swayed by the historic drops in the stock market, the hits to retirement funds of his elderly supporters, the drop in polls of his handling of the economy, the threats of retaliation from various world leaders, the entreaties from advisers and donors such as Elon Musk, the rare warning shot from some congressional Republicans, the disappointed tweets from some of his biggest fans or the studied avoidance of the subject by Fox News anchors.
As I noted in November, bond traders were likely to be one of the first checks on Trump's grandiose plans to remake the country. But it's just as likely they won't be the last.
