Treasury bonds: the asset that scares Trump the most

BarcelonaJust days after announcing a battery of tariffs against most of the world's countries in an event he dubbed Liberation Day, US President Donald Trump reversed course and suspended most of them in an attempt to "negotiate." Although stock markets reacted sharply and most governments criticized the measure, Trump's retreat was largely due to the rise in the price of Treasury bonds, US government debt securities.

In the days following April 2, US debt yields rose significantly in secondary markets due to a massive sell-off in securities (fire sale, in financial jargon) whose origin is still uncertain—some reports pointed to Asian governments, such as Japan or China, which are accumulating large amounts of US debt. The fact is that it was this rise in the interest that the US government must pay on its debt that ultimately persuaded Trump to halt the tariffs and establish negotiations with the states affected by his tariff battery.

US Treasury bonds are one of the pillars of the country's economic hegemony and of the dollar's role as a global reserve currency, a situation that, curiously, Trump wants to end. The US president's Council of Economic Advisers, headed by Stephen Miran, believes that the United States is paying too high a price, in the form of large trade deficits and deindustrialization, to remain the epicenter of the global economy.

"The root of the economic imbalances lies in the persistent overvaluation of the dollar, which prevents the equilibrium of international trade," Miran wrote last November in an article published by Hudson Bay Capital, his investment fund. According to Trump's advisor, this overvaluation of the US currency is due to an excess demand for dollar-denominated assets, with US Treasury bonds being the most in-demand of all.

In the White House's plans to return the US economy to a balance that would allow it to depend less on foreign imports and recover the country's industrial fabric, tariffs are a key element, but the increases initially proposed by Trump were of such magnitude that they had political and financial consequences that went beyond their impact.

Trump hoped—as happened—that the tariff announcement would cause the dollar to depreciate and send the stock market into the red, but he trusted that the markets would welcome the measure regarding debt, since, according to his calculations, the new trade tariffs would improve government revenues. However, the reality is that the markets interpreted the tariffs as increasing the risk of recession in the US, which would imply, in fact, a drop in public revenues (less economic activity and more unemployment mean fewer taxes collected) and an increase in spending (more subsidies for workers, families, and businesses). The tariffs were therefore seen as a negative factor for the US public finances: According to Joan Ribas, a professor of economics at Pompeu Fabra University, an increase in the deficit raises further doubts about the long-term "sustainability of the debt," which currently stands at 122% of gross domestic product (GDP, the indicator).

This worsening of the US government's financial outlook frightened Trump, according to the American press, because it casts doubt on the viability of the tax reduction programs (especially for large companies and large fortunes) with which he ran for the 2024 elections. Furthermore, the fight against the virus played a central role in the campaign that returned him to the White House.

Cheap dollar, high inflation

The other consequence of rising debt is its effect on the dollar's exchange rate and the cost of living. In his article, Miran argues that the dollar is overvalued, which hampers US exports. In fact, the US closed 2024 with a trade deficit (the difference between imports and exports) with the rest of the world of $1.3 trillion, a very considerable figure focused primarily on physical goods (it has a surplus in services): that is, the US doesn't manufacture much of what its citizens consume.

Geopolitical uncertainty, internal tensions, and, finally, tariffs and the impact on debt have diminished the appetite for buying dollars in foreign exchange markets. "Volatility ensures that things will go badly," says Ribas about the White House's economic policy. Since Trump's inauguration on January 20, the US currency has depreciated 9.1% against the euro. It has also lost value against most major reserve currencies, such as the Japanese yen, the British pound, and the Swiss franc.

A depreciation of the currency can serve countries with a tradition of exporting to increase sales of their products abroad, but the US is clearly the opposite: a net importer. Therefore, if the dollar falls against most of its trading partners' currencies, the first and foremost impact will be higher prices for foreign exports, which will make the goods they buy abroad more expensive. In the case of the US economy, these imports are primarily consumer goods—such as clothing, electronics, and furniture—as well as automobiles and industrial machinery.

"This outlook is rather inflationary," Ribas explains of Trump's policies. Adding to this is the fact that tariffs have not been fully implemented and the rising debt has cast doubt on tax cuts, and the three economic pillars of his campaign—lowering taxes, reducing the cost of living, and reindustrializing the country—are far from being realized. However, with the reversal of the tariffs, interest on the debt has normalized and remains at levels similar to those before his return to the presidency.