This article first appeared in The Edge Malaysia Weekly on April 14, 2025 - April 20, 2025

As trillions of US dollars were wiped off the global equity markets in the few days after the much trumpeted April 2 US Liberation Day tariff move, the US president was unfazed. Donald Trump and his tariff hawks Howard Lutnick and Peter Navarro dug in their heels. “There will be no stepping back”. “This is not a negotiation tactic.”

Trump himself said tariffs are like medicine and “you have to take medicine to fix something”, even if it is unpleasant.

And on the morning of April 9, he tweeted on social media, asking Americans to “stay cool” and that all would be well.

But several hours later, instead of staying cool, he flinched and ordered a 90-day pause on the imposition of the hefty so-called reciprocal tariffs — with the exception of those on China.

So, what happened?

Trump was spooked by the unexpected spike in US Treasury (government bonds) yields. Unexpected because normally, when there are economic and financial uncertainties that raise risk, investors switch from other assets to US government bonds in what is called a flight to safety. When this happens, prices go up and yields (the returns relative to price) go down.

But this time, that did not happen. Instead of buying, they sold US government bonds — thereby driving prices down and yields up (see chart). This is because the current volatility and uncertainty were caused by the US government itself, and not by rogue bankers or market traders or because of financial excesses like in the past. It was self-inflicted by Trump and it is the financial markets telling him what they think of his attempt to break up the world trading system and supply chain network as we know it.

A sharp rise in Treasury yields will lead to a higher cost of borrowing for both the American public as well as the government — the exact opposite of what Trump promised his MAGA supporters. And it will cause the 

US$1.3 trillion (RM6.7 trillion) budget deficit he wants to rein in to balloon.  The US dollar has also weakend against major currencies like the euro and Swiss franc.

In September 2022, UK Prime Minister Liz Truss was forced out after just 44 days when the pound plunged and yields of UK government bonds shot up following the tabling of an unfunded £45 billion tax cuts which alarmed financial markets.

Trump paused not because more than 75 countries have gone crawling to him to negotiate, as the White House is claiming. He was scared off by the unanticipated spike in Treasury yields and its consequences.

The pause doesn’t mean that Trump will reverse course completely and who knows what he will do next. But it does show that even the biggest bully has something he is afraid of.

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