On April 2, President Donald Trump revealed his extensive tariff strategy, likely anticipating a negative reaction from the stock market, which quickly materialized. The Standard & Poor’s 500 Index experienced a significant decline of 597 points, or 10.5%, over the subsequent two days. This marked the largest two-day point loss for the S&P 500 since late 2007, surpassing even the losses seen during the outbreak of the COVID-19 pandemic in 2020.
Amid the stock market downturn, the bond market also responded, albeit slightly later. While both stocks and bond yields fell on April 3 and April 4, the 10-year Treasury yield began to rise after reaching 4.009% on Friday, climbing to 4.177% by Monday, and further to 4.304% on Tuesday. By early Wednesday, the yield had surged past 4.5%, a notable increase that caught the attention of President Trump.
In response to the situation, the president described the bond market as becoming “yippy,” a term borrowed from golf indicating nervousness. Consequently, he decided to suspend the recently imposed tariffs for 90 days, which triggered a substantial relief rally in the stock market on Wednesday and Friday. Despite this, the 10-year yield continued to ascend, nearly reaching 4.6% before closing at 4.5% on Friday, marking its highest closure since February. This increase influenced 30-year mortgage rates, with one measure, from Mortgage News Daily, climbing from 6.6% to 7.1% over the past week. Consequently, the monthly principal and interest payment on a $250,000, 30-year fixed-rate mortgage rose from $1,597 to $1,675, a 4.9% hike.
As the trade tensions between the U.S. and China intensified, the Trump administration’s decision to exempt key tech products, such as smartphones, computers, and semiconductors, from the harshest tariffs somewhat alleviated the situation. This move particularly benefited companies like Apple, which assembles most of its iPhones in China, and Nvidia, leading to a rise in their stock prices by 4.1% and 3.1%, respectively.
Despite these developments, the bond market remained critical of the tariff strategy, emphasizing its influence on the cost of money. Normally operating quietly, bond investors play a pivotal role in allocating funds to various sectors of the economy, such as governments, banks, and institutions, which utilize these investments for growth and development. The bond market’s reaction contrasted the relief felt in the stock market, reflecting a larger skepticism about the tariff plan.
Globally, the bond market’s scale surpasses that of the stock market, with a value of $140.7 trillion compared to $115 trillion for global equities, as reported by the Securities Industry and Financial Markets Association (SIFMA). This vast market impacts numerous economic areas, highlighting its critical role in economic stability and growth.
The Trump administration’s tariff strategy faced widespread criticism, drawing opposition from across the political spectrum. Skepticism regarding its execution led to a sell-off in U.S. treasuries, driving yields higher. This scenario illustrated the potential influence of foreign investors, who hold substantial amounts of treasury securities, on the U.S. economy.
Non-U.S. investors possess $8.5 trillion in treasury securities, with Japan, China, and the United Kingdom being the largest holders. Their actions can affect yields significantly, impacting the U.S. Treasury market and other sectors like the mortgage market. As foreign investors adjust their holdings, the mortgage market could experience notable changes, especially with $1.32 trillion in outstanding mortgage securities, a portion held by major foreign investors.
This chain of events underscores the complexities of global financial markets and their interconnectedness, with ongoing developments likely to shape economic conditions in the coming weeks and months.