Investing.com -- Bonds are in charge. This is the sentiment being relayed by market participants recently as they digest the impacts of President Trump's trade policy. In fact, the bond market was given credit for Trump’s 90-day pause of reciprocal tariffs for everyone except China, after the 10-year yield surged from 4% to 4.5% following ‘Liberation Day’.
In a note to clients Thursday, Avery Shenfeld, Chief Economist of CIBC (TSX:CM) World Markets, tackled the “extremely stormy” Treasuries market over the past two weeks.
Shenfeld first highlighted that no one batted an eye when the 10-year fell 40 bps in six days, dropping below 4% on April 4th. However, once it surged to 4.5% in a few days, fingerpointing started.
“In that finger pointing, a squeeze on repo funding for leveraged bond holders, forced selling by those losing money on equities, or bond dumping by China and other countries dismayed by US tariffs were all cited as reasons, with no supporting evidence,” Shenfeld commented.
While conspiracy theories dominate the headlines, Shenfeld said, sometimes the simplest explanation is the best. The simplest explanation would be that the rally that took 10-year rates below 4% was “grossly overdone, dependent on fears of an immediate recession, and a quick dose of Fed easing that blatantly contradicted the central bankers’ stated inflation concerns.”
After the dust settled, Treasuries were right back where they were before the rally in early April, the economist observed.
Shenfeld goes on to say that if people are worried about long-term interest rates, watch the budget process. It’s on pause for recess but will resume soon. The Senate’s bill had minimal spending cuts and included broad tax cuts, beyond just extending Trump-era ones. House conservatives backed it after leadership promised $1.5 trillion in spending cuts. Even if delivered, deficits would remain high—though not far off from market expectations. Treasury investors may worry that the Senate avoided deep cuts due to fears of voter backlash, especially over programs like Medicaid.
“In their absence, the Treasuries market could indeed face trouble ahead,” he commented. “The Senate version with only minor spending cuts would see annual deficits soar from under $2 tn to reach $3 tn by 2031, according to the Committee for a Responsible Budget.”
He said to watch and see whether Congress finds more savings or scales back the tax cuts. GOP fiscal hawks are expected to push back on deficit increases, possibly using the debt ceiling or budget bill as leverage. This fight will likely drag on past the Memorial Day goal. While rising deficits aren't ideal, they may not pressure long-term Treasury yields if the Administration shifts toward issuing more short-term debt—though that risks higher refinancing costs later.
Lastly, Shenfeld said another worry, although highly unlikely, is the rumored "Mar-a-Lago Accord”. One of the elements of the plan is forcing foreign holders of U.S. debt into 100-year bonds at bad rates, possibly using tariff threats, which the economist said is essentially a form of default. While intended to cut financing costs and weaken the dollar, it would damage future demand for U.S. debt, he says. “If there are even tiny probabilities of this outcome now priced-into Treasuries, fading references to the whole Mar-a-Lago package will help nudge yields lower,” he concluded.
