Donald Trump considered it a success in his first term if Wall Street went up, but in this second term, his key indicator is different. This was confessed last February when his Treasury Secretary and market expert, Scott Bessent, took office. "The president and I will be focused on the 10-year bond." That's why there was initial euphoria in the White House after the announcement of tariffs for everyone on April 2. The chaos was such that investors sought refuge in the theoretically safest financial asset in the world: the US Treasury bond.
As demand grew, the yield demanded by investors from the White House fell, even dropping below 4%, a success for Trump's plans. The bond is a key indicator for corporate debt, mortgages, and credit cards in the US; if it rises, financing becomes more expensive for everyone, if it falls, it becomes cheaper and boosts the president's popularity.
However, as days passed, the high demand for bonds began to translate into sales. The Treasury's three-year bond auction last Tuesday was already a serious warning, and the one expected for this Wednesday looked bad, very bad.
From the 3.95% demanded by investors days before, it jumped to 4.6%, a huge increase in an asset usually calm with few surprises. Several factors had come together for such an increase: the need for liquidity by traders due to the stock market crash and the growing sense that the safest US financial asset is no longer so due to the absolute legal uncertainty sown by the White House.
On Wall Street, there was speculation that Bessent had to act urgently on Wednesday morning and call the major funds to prevent the auction from failing. It would never go unsold, but low demand would be lethal for Trump's flagship indicator. Nerves also facilitated retaliation from the most affected enemy by the new tariffs: China.
Retaliation? Globalization has brought an unprecedented interconnection between the two major world powers. The US buys Chinese products but benefits from the fact that the powerful eastern country is the second-largest holder of US debt. It has been a win-win situation in recent years. The US sources cheap Chinese products financed by the seller itself.
Now, China's own economy would destabilize if it sold the US bonds it holds, but it does have room, as it has shown in recent years, to reduce its purchases and diversify its portfolio in Europe and other regions.
Simply put, if China does not show up at the auctions, US debt will become more expensive, and this risk spread in the markets on Wednesday, while at the same time, Xi Jinping's country responded boldly to the trade war.
"Markets are now concerned that China and other countries may dispose of US Treasury bonds as a retaliatory tool," wrote Grace Tam, chief advisor at BNP Paribas Wealth Management in Hong Kong, to her clients.
Matthew Scott, an analyst at AllianceBernstein, said that rumors of debt holders fleeing had spread after the disappointing demand for three-year bonds worth $58 billion the day before.
Bessent's messages about willingness to negotiate in the trade war and the US president's pause eventually straightened the day. The yield demanded on the bond dropped back to 4.3% after an auction that turned out better than expected, and other key indicators for Trump, such as cryptocurrencies and Wall Street, showed positive signs.
But gold also continued to rise as a safe haven asset as a sign that investors still do not see the end of the folly of causing an increase in US financing costs. Trump peered into the abyss before easing the pressure and also created the impression in the markets that his great enemy has revenge tools. But they are limited. As Confucius wrote: "Before embarking on a journey of revenge, dig two graves." One for the traveler. All losers for now after another nerve-wracking day.