Did Treasury bond markets cause Trump tariff blink?

President Donald Trump's decision to retreat from his "no exemptions" and "no negotiations'" tariff regime just hours after it was imposed may have been triggered by worrying moves in the bond market that, unlikely the sell-off in stocks, could have caused notably more harm to the U.S. financial system.

Trump told reporters in Washington last night that, despite having previously insisted he wasn't watching the markets at all, things were getting "a bit yippy" on Wall Street.

That wasn't entirely the case yesterday, however, when stocks were moving firmly higher from their post-'Liberation Day' trough and the President himself was declaring it a "good time to buy" on this Truth Social media platform. 

What was certainly in focus, however, was the sell-off in U.S. Treasury bonds, the largest in five years, that was starting to raise the risk of a so-called 'credit event' in financial markets that might have involved intervention from the Federal Reserve, which stepped-in with a $1.6 trillion rescue when during the Treasury market collapse in March of 2020. 

Trump described the bond market yesterday as "a little queasy" prior to his tariff reversal.

"Government bond yields had been rising at a worrying rate and stock markets showed no sign of stabilizing," said Marcus Brookes, chief investment officer at London-based Quilter Investors. "Trump has likely stepped in before he would have had his hand forced by the Federal Reserve, a humiliation he clearly wants to avoid."

Treasury yield pressures

The violent selloff in Treasuries, which included a massive 60 basis point move in benchmark 10-year note yields from last Friday's low to yesterday's peak, has been tied to a host of tariff-related factors, but was also seen as causing stress in the market for so-called basis trades.

In this corner of the $29Treasury bond markets, hedge funds typically use large amounts of leverage to exploit the minute differences between cash Treasury bonds and Treasury futures, which trade largely in close relation to each other. 

The past week's tariff turmoil, however, threw those trades out of whack, particularly as they relate to the movements of long bond yields and the Japanese yen, which tends to weaken when Treasury yields rise (and vice-versa).

Related: Bond markets whipsaw amid 'sell America' trade in safe-haven Treasuries

"Over the last few sessions, however, we have seen some dramatic divergences from traditional correlations as US long treasury yields surged violently higher off recent lows," said John Hardy, global head of macro strategy at Saxo Bank. 

"This massive treasury selling suggested systemic instability in the US treasury market – something that is intolerable for markets and usually can’t sustain for more than a few days," he added. "Had the treasury market volatility continued, the Fed would likely have stepped into calm things, driving a U.S. dollar sell-off across the board."

'Beautiful' bond market

Little is known about the timing of President Trump's decision, or how it was ultimately made, but his Truth Social message indicating a 90-day tariff pause, which was posted at around 1:18 pm Eastern time, followed a White House meeting with Treasury Secretary Scott Bessent. 

Curiously, by then, the market had already digested a better-than-expected auction of $39 billion in 10-year notes, which included a massive surge in purchases from foreign buyers and bids worth more than $105 billion.

Benchmark yields moved lower in the wake of the auction results, which were posted at around 1:02 pm Eastern time, with Bessent citing the demand when he spoke to reporters later in the afternoon.

The narrow window between the auction results, when 10-year notes were trading 4 basis points lower at 4.395%, and the President's Truth Social posting suggests the two events might not be directly-related, but it doesn't discount that fact the the bond market selloff had factored deeply into his decision.

Related: 10-year bond auction will provide key test to Trump's tariff strategy

Stocks, after all, remain nearly 4% south of their April 2 'Liberation Day' close, with the S&P 500 still down more than 7% for the year, even after the benchmark's strongest single-day gain since 2008.

“The bond market right now is beautiful,” Trump told reporters in Washington last night. 

Perhaps. But investors are seeing 10-year notes yields creep higher in early trading, with the paper last marked at 4.301% and the Merrill Lynch Option Volatility Estimate, or MOVE index, a key gauge of bond market volatility, remains pinned near the highest levels in six months. 

And a $22 billion auction of 30-year bonds, whose yields past the 5% level for the first time since November of 2023 last year, looms later this afternoon.

More Economic Analysis:

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"Risk assets are benefiting from the delay in tariffs, but rate markets remain careful about outstanding risks," said ING's research head Padhraic Garvery, who described the Treasury market reaction as a "mild thumbs up" to the tariff pause.

"Bonds are signaling that the pause is significant, yet not much has fundamentally changed," he said. "This could shift if the 90-day pause becomes permanent. Until then, the US bond market remains somewhat negatively impacted by the initial tariff actions."