On April 2nd, President Trump announced tariff rates on nearly every country in the world that far exceeded analysts’ highest expectations. The result was a 10% market selloff in the ensuing two days, the fourth largest since WW2. Markets got a reprieve on April 9th, when Trump announced a 90-day pause to most of the announced tariffs in excess of 10%. Despite the reprieve, markets moved lower again on April 10th as investors worry the flat 10% tariff on nearly all goods will hinder economic growth.
More obscure but likely more important was the bond market’s reaction to the tariff announcement. Immediately following the announcement, there was a rush into treasuries as traders looked towards safe-haven assets. That rally was short-lived. Come Monday, April 7th, bond yields started backing up with the yield on the U.S. 10-year moving from 4% to 4.5% in 48 hours. Long-duration Treasuries fell as much as stocks did. The implications of the bond market are enormous.
First, the bond market is larger than the stock market in terms of dollars invested.
Bond yields affect borrowing costs of companies, which impact earnings and subsequently stock prices.
Higher yields increase borrowing costs for consumers. Mortgages, auto loans, HELOCs, personal loans, student loans, credit cards, and so forth, all are affected by interest rates.
Our government runs a $2 trillion deficit each year. Being able to borrow at relatively low interest rates is critical to the nation as a going concern.
All these things are interconnected. The Republican Party is trying to pass tax cuts that will add anywhere from $3 trillion to $6 trillion to the national debt over the next decade (this is in addition to the $20 trillion fiscal deficit we’re expected to run as is). Higher interest rates would make this less tenable, which many suspect was the primary motivator to Trump announcing the 90-day tariff pause when he did.
Bonds moved higher in part because tariffs are expected to be inflationary, and inflation is the single biggest driver of interest rates. In addition, foreign entities own 30% of our $28 trillion of publicly traded treasuries, with Japan and China owning close to $2 trillion combined. In a scenario of economic warfare, it’s imaginable that some of these entities would sell their treasuries, flooding the market with supply and sending yields significantly higher. Ironically, foreign entities have the dollars to buy U.S. Treasuries because of our trade deficit.
Going forward, all eyes will be on tariff policy, how company earnings are affected by the tariffs in place, how the Federal Reserve will react to the markets, and what happens to medium and long-term interest rates. Remember, the Federal Reserve is very effective in controlling short-term interest rates, but has much less control over longer-term rates.
Rialto Wealth Management is a fee-only, fiduciary, advisory firm based in Syracuse, NY. From financial planning to investment management, we help families across New York and beyond. We can be reached by phone at (315) 992-9129 or via email through our website’s secure and confidential contact page.
Q1 2025 Market Commentary Update
April 10, 2025 by Ethan Gilbert
On April 2nd, President Trump announced tariff rates on nearly every country in the world that far exceeded analysts’ highest expectations. The result was a 10% market selloff in the ensuing two days, the fourth largest since WW2. Markets got a reprieve on April 9th, when Trump announced a 90-day pause to most of the announced tariffs in excess of 10%. Despite the reprieve, markets moved lower again on April 10th as investors worry the flat 10% tariff on nearly all goods will hinder economic growth.
More obscure but likely more important was the bond market’s reaction to the tariff announcement. Immediately following the announcement, there was a rush into treasuries as traders looked towards safe-haven assets. That rally was short-lived. Come Monday, April 7th, bond yields started backing up with the yield on the U.S. 10-year moving from 4% to 4.5% in 48 hours. Long-duration Treasuries fell as much as stocks did. The implications of the bond market are enormous.
All these things are interconnected. The Republican Party is trying to pass tax cuts that will add anywhere from $3 trillion to $6 trillion to the national debt over the next decade (this is in addition to the $20 trillion fiscal deficit we’re expected to run as is). Higher interest rates would make this less tenable, which many suspect was the primary motivator to Trump announcing the 90-day tariff pause when he did.
Bonds moved higher in part because tariffs are expected to be inflationary, and inflation is the single biggest driver of interest rates. In addition, foreign entities own 30% of our $28 trillion of publicly traded treasuries, with Japan and China owning close to $2 trillion combined. In a scenario of economic warfare, it’s imaginable that some of these entities would sell their treasuries, flooding the market with supply and sending yields significantly higher. Ironically, foreign entities have the dollars to buy U.S. Treasuries because of our trade deficit.
Going forward, all eyes will be on tariff policy, how company earnings are affected by the tariffs in place, how the Federal Reserve will react to the markets, and what happens to medium and long-term interest rates. Remember, the Federal Reserve is very effective in controlling short-term interest rates, but has much less control over longer-term rates.
Rialto Wealth Management is a fee-only, fiduciary, advisory firm based in Syracuse, NY. From financial planning to investment management, we help families across New York and beyond. We can be reached by phone at (315) 992-9129 or via email through our website’s secure and confidential contact page.