The bond market isn't playing ball with Trump

• The trade war is roiling the US bond market.
• The 10-year Treasury yield has jumped, pushing past 4.5% as the new tariffs on China kicked in.
• The move higher in yields is the exact opposite of what the administration has said it wants.

Trump's latest escalation in the trade war has the bond market throwing a fit— and the move in US government bonds is the opposite of what President Donald Trump has signaled he's looking for.

The administration has used the said it wants borrowing costs to be lower for Americans, and has excused the pain in the stock market as a necessary consequence of getting to that goal.

"We cut the spending, we cut the size of government, we get more efficiency in government, and we're going to go into a good interest rate cycle," Treasury Secretary Scott Bessent said in February, saying the administration's actions were why yields were falling at that time.

But investors aren't playing ball now as Trump's trade war accelerates. They're selling US bonds even as recession concerns spike and stocks sell off for a fifth day on Wednesday.

Investors sold off US Treasuries as new tariffs on China kicked in on Wednesday, lifting the overall tariff rate on Chinese goods to 104%. China has since retaliated again, raising its tariff rate on US goods to 84%.

The yield on the 10-year US Treasury bond, which moves inversely to its price, briefly spiked past 4.5% overnight and traded around 4.45% early Wednesday. It's the highest the 10-year yield has been since the weeks after Trump first took office, when the president announced a 25% tariff on Mexico and Canada.

Notably, the move in US government bonds is the opposite of what Trump has signaled he's looking for. The administration has said it wants borrowing costs to be lower for Americans, and has excused the pain in the stock market as a necessary consequence of getting to that goal.

Why are bonds selling off?

Bonds are usually an obvious choice for investors looking for shelter from the storm when recession fears are running high. Yields will often plunge as traders pile into ultra-safe Treasurys.

That's not the case now, even as Trump's trade war ramps up calls for an economic downturn to hit in 2025. Markets have a few ideas as to why this might be.

The first could simply be that investors aren't as confident in the US as a safe haven amid the tumult.

"Investors began to question whether US government debt still qualifies as a reliable safe haven amid geopolitical and fiscal uncertainty. But there are also concerns of forced selling amid fears that something has come untethered in the complex financial plumbing on which all markets are based," David Morrison, a senior market analyst at Trade Nation, wrote in a note on Wednesday.

However, as Lawrence Gillum, chief fixed income strategist at LPL Financial, points out, the bond sell-off has become a global phenomenon in recent days.

"Treasury securities have not acted like haven assets yet. But, if the economic environment does indeed soften to the point of an economic contraction, we would expect Treasury yields to fall from current levels," Gillum said.

Investors are also concerned that China, in need of US dollars, may begin selling its holdings of US Treasurys as trade between the two nations starts to wane. China held $760 billion in US Treasurys at the start of the year, according to Treasury Department data.

Finally, there's something called the basis trade, which may be in the process of being partly unwound. Apollo chief economist Torsten Sløk flagged this as a risk in a note on Tuesday.

The basis trade is an $800 billion leveraged bet on Treasurys put on by hedge funds — and it's a risk in the event of unexpected shocks.

"In case of an exogenous shock, the highly leveraged long positions in cash Treasury securities by hedge funds are at risk of being rapidly unwound," Torsten Slok, the chief economist at Apollo Global Management wrote in a note on Tuesday.

Gillum also flagged the basis trade on Wednesday as a likely source of the turmoil.

"We would argue the larger cause is the unwinding of the basis trade and not foreign investors selling bonds to retaliate against tariffs," he said.

The latest duties on US imports from China have lifted the overall US tariff rate to its highest level in over a century, a sign that Trump's trade policies have spiraled into a full-blown trade war.

Tensions between the US and China have been rising for weeks on the trade issue. On Monday, China said it would "fight to the end" after Trump announced an additional 50% tariff on the nation, on top of the 54% tariffs he announced since taking office.

On Wednesday, Beijing retaliated against the latest tariffs by imposing an 84% reciprocal tariff on US goods, while urging "the US to immediately correct its wrong practices," according to a government statement.