Stock, bond, currency and commodity markets continue to try and second-guess the implications of president Trump’s trade and tariff policies.

It’s hard to be dogmatic – which may be part of the problem – but all we can probably say with any certainty is 2024’s surge in US equity valuations reflected the view that inflation would cool, interest rates would fall and growth would be steady in 2025 and beyond.

However, Trump’s initial tariff moves in his second term are shaking faith in that rosy trifecta: inflation could be higher, interest rates may fall more slowly than expected and the growth outlook is less clear.

Anything in terms of tariff deals or concessions which gets the world back on track toward lower inflation, lower rates and steady growth is therefore likely to be seen as a good thing for share prices and anything that takes them further away may be taken badly by equity investors.

The fixed-income markets may have a different view, however, and it is here that Trump and treasury secretary Scott Bessent may be focusing their attention.

Thus far, Trump seems impervious to stock market volatility, in contrast to his first term, and willing to embrace some near-term pain in exchange for what he views as the long-term gain – higher revenues from tariffs, more jobs on US soil and higher growth with, further down the road, perhaps the chance to cut income tax as a result.

Bessent seems equally determined, judging by his televised comments about the need for America’s economy and companies to wean themselves off their addiction to government spending.

Whether we agree with them or not, therefore, it may pay to judge the efficacy of the White House’s policies through the prism of the US government bond or treasury market, rather than via the S&P 500, Dow Jones or NASDAQ Composite equity indices.

SCARY NUMBERS

Bessent appears concerned by four, interconnected, issues.

Federal borrowing has continued to soar. At the end of 2024 it stood at a record $36.2 trillion, and the Congressional Budget Office’s January estimates suggested it will grow by $22.1 trillion in the next 10 years.

The interest bill has therefore shot up to an annualised rate of $1.1 trillion, or a fifth of America’s taxation income. That is forcing the discussion about federal spending cuts and increasing revenue from tariffs (among other sources).

The average interest rate on the US federal debt is 3.27%, but the benchmark two- and 10-year Treasuries yield 4% and 4.37% respectively, at the time of writing. Any new issuance is thus going to be more expensive, as is replacing and refinancing existing paper. The bad news here is the profile is very short, with half of the publicly-held debt due to mature in the next three years.

This may be why 10-year yields are refusing to go down, even as the US Federal Reserve cuts headline borrowing costs – the ‘bond vigilantes’ are looking at the amount of paper coming their way from new paper to cover both fresh borrowing and refinanced debt.

YIELD TO PRESSURE

These numbers focus the mind and mean America must at least make a good show of tackling the national debt.

Otherwise, the cost of borrowing could soar, meaning the interest bills either become so crushing they hobble the economy, or the US has to print its way out of trouble so it can pay, with all of the inflationary implications that has, even for the globe’s reserve currency.

This is also at a time when the US economy is growing – an unexpected recession would hit tax income, increase welfare spending, and make things look even worse.

Again, in this context it is easy to see why Trump and Bessent are focused on the bond market, not the stock market, because the stakes are potentially very high.

At least they can draw some comfort from how the 10-year yield is no higher now than when Trump prevailed in the 2024 election, in contrast to the trends evident elsewhere.

But the danger is the sort of austerity promised by the Department of Government Efficiency’s spending cuts leads to the slowdown or recession that simply blows up the numbers, or at least forces some more highly unorthodox policies.

And that could just be why gold continues to march higher, seemingly in lockstep with the US deficit, as investors seek a bolthole just in case something really unusual develops.

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