Blain’s Morning Porridge April 10^th 2025 – Bond Market Punches Trump in the Mouth

“I would like to come back as the bond market. It can intimidate everybody.”

Trump’s supporters think he just played a blinder of masterstroke reversing tariffs. Those of us with clearer minds and an understanding of finance know the truth – Trump lost. The bond market punched him hard between the eyes.

The Gods of Finance will be pissing themselves with laughter this morning…..

Only two questions really matter:

Does Trump’s backdown on tariffs trigger anything more than a relief rally?

Probably not.

I can’t understand why Apple rallied 15% last night, when 125% China Tariffs mean a new top-level i-Phone will cost a US citizen around $1900! That’s cheaper than the $3500 Wedbush Securities’ Dan Ives estimates a US domestically produced i-Phone would retail at! So no new jobs or repatriated production there then. Instead US businesses face an uphill struggle persuading the market US exceptionalism is still a thing. Smart investors know you don’t bet on unpredictability.

The negative effects of the tariff threat can’t be undone overnight. Trump has damaged confidence in the USA, and even if tariffs are never mentioned again, the 70% of Canadians who cancelled US holidays, the govt workers now in fear their jobs will be cut by DOGE, or the CEO’s who will delay investments till the picture is clearer, all point to declining sentiment and lower spending, impacting corporate creditworthiness and the bottom line.

125% tariffs on China will generate a significant inflationary impulse.

Where does the Global Economy go from here?

Trump thinks the world will flock back to Washington. Nope.

The world wants certainty and reliable business/investment partners. The reality is US businessmen and financiers have a very limited timeframe to persuade the world Trump is an aberration, and the USA will again become a reliable and trustworthy partner. A new world trading order is set to emerge linking Europe to Asia (not just China) through the Middle East. There is a strong possibility the map of the new global economy will have a large USA shaped blank on its’ upper left-hand corner.

But first… what happened to change Trump’s mind on Tariffs?

I’m almost satisfied with the note I wrote yesterday: “Don’t forget my key market mantra: “In Bonds There is Truth.” The US 10-year Treasury has spiked from 4% to 4.43% over just a few days – ask yourself what that might just mean when everyone is warning about recession? Speak not the word… but it is Stagflation! No wonder liquidity is drying up.”

History never quite repeats itself – but events do resonate.

• In 2022 short-lived UK Premier Liz the Lettuce Truss spooked UK markets through her gross incompetence, sending Gilts into a tailspin, precipitating an unanticipated bail-out by the Bank of England as crashing prices triggered margin calls on highly leveraged gilt-based Liability-Driven Investments (LDI).
• Last night Donald Trump blinked and rolled back his tariff threats in the face of a similar imminent Bond Market Crisis. Treasury Secretary Scott Bessent and Cantor CEO (and Secretary of Commerce) Howard Lutnick successfully talked Trump into standing down on Tariffs as margin calls on highly levered basis trades in US Treasuries threatened a catastrophic collapse in the US bond market.

When markets shudder, and liquidity dries up, the only way to exit or meet margin calls is to sell what you can – not what you want to. In a conventional market, that means selling liquid assets like Treasuries. But when 100x levered US Bond plays are the trigger for margin calls – then even the mighty Treasury market would likely become as liquid as set concrete.

I’ve written many times about Virtuous Sovereign Trinity theory; when a nation has a stable currency, a sustainable bond market, and competent politics, it will tend to do well. However, if any of these three legs is unstable, the whole economy will wobble.

Trump’s political incompetency – illustrated by the inanity around the Tariffs – threatened to trigger a bond crisis. It seems to have been narrowly averted. It would have hit the third leg, seeing the dollar crushed as the de-facto global medium of exchange. As I’ve warned multiple times – these things can happen at tremendous speed, and only swift action and acute self-awareness of the problem can avert crises turning catastrophic.

I suspect Trump’s minions will be keen to pretend it didn’t happen, that highly levered hedge funds caught the wrong side of the basis trade in Japan, London and Luxembourg weren’t in crisis this week. They will spin the tale it never happened, that Trump is a genius, denying markets were heading into a tailspin even worse than the stock sell off the Orangeman’s tariff plans first precipitated. But the rapid rise in bond yields – 50 bp in the 10-yr – over the past 4 days illustrates all too clearly where the play was headed.

Given the lack of financial nuance on Team Trump, and their antipathy to trying to understand the consequences of consequences, can you imagine how bad it might have got?

In 1998 the market experienced a similar levered-crisis event, the Long-Term Capital Management collapse. The US authorities, the Fed and leading banks swiftly came together and put together a stabilisation plan that calmed markets and stemmed the jitters. In the wake of 2008 collapse of Lehman, same thing again – global cooperation to avert disaster. During the Covid crisis, the well-oiled cooperation of Treasury departments, Central Banks and Financial Institutions turned crisis into recovery.

Can you imagine how a bond market crisis bailout would have occurred under Trump given his lack of understanding, his lack of competent cabinet members, the way he’s insulted the USA’s closest allies, his antipathy towards the Fed? We just dodged the big one. It would have been chaos.

Where do we go from here?

Although bond yields look stable this morning, the underlying crisis is not done. Global investors and governments have lost confidence in Trump. He is too unstable and chaotic. He is surrounded by incompetent, unqualified yes-men. You can’t plan investment into US assets based on an inconsistent clown changing his mind depending on whoever spoke to him last.

It also begs the question who will be buying Treasury bonds if hedge funds playing the basis trade (shorting futures vs long treasuries) are out the game? The US has a massive funding gap to fund in the next two years – $15 trillion. China isn’t going to buy. Japan won’t be buying. Europe won’t be buying. The Middle East won’t be buying. Why? Why would they? Trump has made his contempt clear. America first? Fund your own deficit – which will mean printing money, fuelling inflation and crushing the dollar.

There are few good outcomes here. US bond yields will remain under upwards pressure because of resentment, uncertainty and distrust of Trump – Who wants to buy into a potential bond bear market?

Last night in Washington was cringeworthy. How do you know Scott Bessent was lying when he proudly announced to the world last night that Trump’s 180 degree swing and 90 day pause on Tariff was “strategy all along”? His lips were moving and watch his hands. Trump’s scary Press Secretary Karoline Leavitt would be hilarious if you didn’t think she believes the utter garbage she parrots: “The entire world is calling the USA, not China, because they need our markets.” Er, no. We don’t.

But we ought to give Lutnick and Bessent credit – if, as I am reliably informed, they were responsible for changing Trump’s mind on tariffs. If so, they did us all a service.

The lesson is simple – economies are complex things, don’t let incompetents anywhere near the lever of real power; The Bond Market. In bonds there is truth. It only took three days of rising bond yields – a tumble in Treasury prices – to reveal the consequences of the utter insanity of what’s Trump’s plan was doing to the US: raising the spectre of an un-fundable US bond market in a depressed stagflationary economy. I am unconvinced much has really changed.

Out of time and back to the day job..

Bill Blain

Author Morning Porridge

Founder Windshift Capital

Partner Shard Capital