Pay attention to market signals that are flashing red

How US bonds responded to tariffs show the value of price signals from better clued-in markets

- NARAYAN RAMACHANDRAN

In a few short weeks, US President Donald Trump has upended economics as we have known it. In this carnage, one economic concept that has not only survived but gained strength is the integral role of prices in providing quick feedback. Trump had initiated the widest and largest tariff hike in American history, but blinked when US bond prices signaled danger.

Of course, the US bond market is no small matter. At $28 trillion in size, it is a beast of a market that has hitherto anchored the global financial system. When this market shakes, it amounts to a referendum on the world's confidence in the US. In reaction to Trump's 'Liberation Day' announcements, yields on 10-year Treasury bonds rose 50 basis points in frenetic trading; the yield on its 30-year bond breached 5%.

If investors are worried about economic growth in the US, yields should be falling, not rising. But yields rose because of extreme uncertainty and the threat of inflation unleashed by America's unprecedented and chaotically implemented tariffs.

Foreign governments and investors own roughly 30% of all Treasuries, worth nearly $8.5 trillion. Japan holds over $1 trillion of them and the UK as well as China about $750 billion each. India ranks 14th on the list, with about $225 billion. It seems entirely plausible that in addition to US institutional investors dumping Treasuries, some coordinated selling was done by foreign countries, resulting in April's bond market rout. Diplomatic pushback, newspaper opeds and corporate lobbying apparently had less impact than the bond market's price signal in just one session.