US bond markets erupted on Wednesday as panicked investors scrambled to cash them in in the wake of Donald Trump’s tariffs and the trade war that followed.The yield, or interest rate, for US government 30-year bonds spiked – a possible indicator of economic downturn – forcing the US president to perform a dramatic U-turn that saw him announce a temporary pause on tariffs for all countries but China.“The bond market is very tricky, I was watching it. But yeah, I saw last night where people were getting a little queasy,” said Mr Trump as he laid out a 90-day pause on retaliatory levies.The humiliating backtrack has striking similarities with Liz Truss’s rapid downfall as prime minister – also prompted by the bond market response to her disastrous mini-budget.Here The Independent looks at the financial turmoil caused by both and what it might mean for Mr Trump’s future in the White House.Has Trump really reversed the damage?Ms Truss’s tenure in Downing Street lasted just 49 days after her mini-budget tanked the markets and saw the pound sink to a 37-year low against the dollar.Alongside then-Chancellor Kwasi Kwarteng, she announced the biggest raft of tax cuts for half a century in the September 2022 statement. The pair were eventually forced to climb down over their plan to scrap the top rate of income tax for the highest earners.But where Mr Trump has intervened quickly to row back on his tariffs, Ms Truss was criticised for acting too slowly – a move that largely contributed to the economic turmoil in the UK.“One advantage Trump has over Truss is that his inconsistency means he changed his mind pretty rapidly, unlike Liz Truss, who was doggedly determined to head over the cliff,” Sir John Curtice, the leading British pollling expert, told The Independent.But other analysts are more cautious on Trump’s tariff row back, highlighting that the measures are only delayed for the time being, and the China levies – which have now climbed to 125 per cent, with reciprocal tariffs of the same amount also fired back by Beijing – still upsetting the markets.“The pause has improved conditions in the bond market, but it hasn’t entirely alleviated the concerns that have been caused by this trade policy debacle,” explains Laith Khalaf, head of investment analysis at AJ Bell. “Tariffs are, as far as we know, still coming in in 90 days. And let’s not forget that there are still very large tariffs on China, and China has imposed large tariffs on the US,” he added.US government bonds saw yield rates spike in a “bond market meltdown” following Trump’s tariff announcements. According to government data, the US 30-Year Treasury yield has been broadly increasing since the beginning of April, after a dip when the US first unleashed new tariffs.Late on Tuesday night the yield rate reached 5 per cent before hovering around 4.9 per cent; with the latest figures at 4.83 per cent at time of writing. Meanwhile 10-year yields rose to 4.5 per cent.US bonds are used as a benchmark for the cost of borrowing worldwide, and higher yields increase the cost of debt.“The government bond markets form the bedrock of financial markets, and none is more important than that of the US,” explains Mr Khalaf.“Treasury bonds are viewed as the basis of a risk-free asset, from which other assets are priced. Rising bond yields mean higher costs for companies to borrow, and of course governments too.”Similarly, the panic around Truss’ mini budget saw 30-year gilts (bonds) reach 4.99 per cent on September 27 – a huge rise from just 3.78 per cent before she announced her plans.Gilt yields had already began to climb slightly before Ms Truss came into power, but the mini-budget brought those rates to new highs at sustained rates.The move forced the Bank of England to intervene by buying up up to £65 billion worth of government bonds to prevent borrowing costs from spiralling out of control.That extraordinary intervention caused bond yields to stabilise but they remained higher than pre-Truss levels, and climbed again shortly after. The fluctuation in the US bond market caused by Trump’s tariffs, however, has been much smaller.“So far selling in the bond market has not been as dramatic as during the Liz Truss era,” said Mr Khalaf. “The yield on the 10-year US Treasury bond is now only a touch over where it started April, though it’s been far from a straight line from there to here. The volatility in bond markets reflects the rollercoaster ride markets are on at the moment.”But while Ms Truss’ actions only affected UK markets, Trump’s tariffs have sent shockwaves around the world. Graham Slade, international economist from financial researchers Morningstar said: “The rise in US treasury yields has lifted sovereign borrowing costs globally, with yields on UK and Japanese government debt rising in concert. The increase in borrowing costs comes at an inopportune moment for the UK government.”The value of the pound began to plummet after the mini-budget in 2022, and hit a record low of just $1.03 on September 25. The dollar index (DXY) has seen similar movement since Mr Trump came into office. While the value of the dollar climbed steadily when Mr Trump was elected in November, it has been steadily falling since his inauguration on January 20. The biggest drops have taken place in early March – when tariffs on China, Mexico and Canada came into effect – and since the beginning of April, when Mr Trump geared up for the slew of ‘Liberation Day’ tariffs on countries worldwide.Now, the dollar index is at just 101.6, compared to 109.3 on inauguration day. By comparison, it grew stronger over the first three months of Joe Biden’s presidency. Will bonds spell trouble for Trump in the polls?The mini-budget and bond crisis undoubtedly brought about Ms Truss’s downfall, with the public – and MPs – placing blame for the state of the economy firmly at her door. She lost the backing of the Conservatives and was ultimately forced to resign.In the current US political sphere, it is hard to know what it might take to rock the seemingly unshakeable support Mr Trump has from his die-hard Make America Great Again (MAGA) supporters. But his approval ratings are taking a tumble, and the economy is an influence.In the UK, governments who preside over periods of economic turmoil often suffer, Mr Curtice said.In the US, however, markets tend to be stronger as they are backed by the dollar; but this level of turbulence across stocks, bonds and trade could buck the trend. “Even Trump seems to be reaching his limits,” Mr Curtice added. “But whether this will sway Trump supporters is a different question.”Ms Truss’s fall from grace was quite spectacular, with her approval ratings falling from -2 per cent (Ipsos) at the start of her tenure to -70 per cent (YouGov) just six weeks in. But Mr Trump is not immune either. His approval rating among Americans was at +4 per cent at the start of his second term (January 28), but has slowly crumbled since mid-February, according to YouGov polls.Now, his approval rating is net negative, at -7 per cent as of April 7; taking a significant dip in recent weeks amid his escalating trade war. When asked what are the most important issues among the American public, respondents consistently place inflation and prices (22 per cent), and jobs and the economy (12 per cent), as top concerns. Since coming into office, taxes and government spending have also become a higher concern for Americans, with 9 per cent saying it is the most important issue (up from 5 per cent in early January). Global and US economies remain at riskBeyond Mr Trump’s political support, the market volatility and pressures in the bond market could have greater risks for a major economic event, warns Mr Khalaf.“The big risk is that wildly volatile market prices lead to something fundamental breaking, as we saw with Long Term Capital Management in 1998, Lehman Brothers [that sparked the Global Financial Crisis] in 2008, or LDI pension funds in 2022,” he said. “No doubt the US Fed will find itself in the spotlight as markets look for signs of a rescue, with some discussion of an emergency rate cut. That could put a floor under falling markets, but might stoke inflationary problems further down the line.”As the US dollar underpins global markets, and Trump’s tariff policies are taking aim at international trade, any economic downturns will inevitably be felt worldwide. More
