Weekly Insights: Tariff Pause, Bond Market Shock—Turning Point or Trap?

Performance of Global Equity Indices(in US Dollar)

• Last week, there was a turning point in Trump’s reciprocal tariff policy, as he announced a 90-day pause, sparking a wave of optimism across global capital markets. Previously suppressed bullish sentiment surged, with the Nasdaq 100 Index jumping over 12% in a single day on Wednesday—marking the third-largest one-day gain in over half a century. On the other hand, Greater China assets suffered a Black Monday. The Hang Seng Tech Index plunged nearly 18% in one session, while CSI 300 and Shanghai Composite showed relative resilience, with declines that have since largely recovered.

• This week, a sharp and sustained sell-off in long-dated U.S. Treasuries directly pressured Trump to soften his tariff stance. We believe this episode has revealed a critical vulnerability for Trump: U.S. government debt. While tariff negotiations are ongoing and uncertainty persists, we now have a clearer anchor in place. Meanwhile, inflation data has improved, and several Fed officials have taken a dovish tone, helping to ease concerns over the Fed’s rate path.

• This week, the key focus will be on whether there is a breakthrough in tariff negotiations, as well as the earnings outlooks for the banking and technology sectors.

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Key Market Themes

Tariff Pause, Bond Market Shock—Turning Point or Trap?

• Last week saw wild swings across global financial assets. As we anticipated, U.S. equities found a short-term bottom, and following Trump’s announcement of a 90-day pause on reciprocal tariffs, markets launched a strong rebound. The Nasdaq surged over 12% on Wednesday, marking the third-largest single-day gain in nearly 40 years. However, this may not be as positive as it seems—historically, such dramatic one-day rallies in U.S. equities have often occurred during periods of market crisis, such as the 2000 dot-com bubble, the 2008 subprime meltdown, or Black Monday in 1987.

• At the same time, U.S. inflation data surprised slightly to the downside. Both CPI and PPI posted month-over-month declines of -0.1% and -0.4%, respectively—significantly better than market expectations. Yet, market reaction remained relatively muted. We believe there are two main reasons:

  1.March inflation data does not yet reflect the impact of reciprocal tariffs, so markets are waiting for more clarity on future price pressures.

  2.In the face of Trump’s erratic policy swings, even encouraging data feels insignificant and unstable.

  The current reality is that positive data alone is no longer enough to sustain a market rally, while any negative surprise can still trigger sharp sell-offs. Overall, market sentiment remains fragile and cautious.

• However, it's not all bad news. Last week, several Fed officials delivered dovish signals, offering a degree of reassurance to markets. New York Fed President John Williams and Boston Fed President Susan Collins both stated that the Fed is fully prepared to step in if necessary, emphasizing that they stand ready to provide support to stabilize markets if conditions warrant. Even more notably, Fed Governor Christopher Waller, widely seen as a potential future Fed Chair, made an unusually direct remark: “While I expect the inflationary effects of higher tariffs to be temporary, their effects on output and employment could be longer-lasting and an important factor in determining the appropriate stance of monetary policy. If the slowdown is significant and even threatens a recession, then I would expect to favor cutting the FOMC's policy rate sooner, and to a greater extent than I had previously thought.” These statements suggest that uncertainty around rate cuts is beginning to ease, and the Fed is clearly signaling its willingness to act if economic risks escalate.

• However, the most significant development in global capital markets last week wasn't in equities—it was in the bond market. Starting April 8, U.S. long-term Treasury yields surged nearly 70 basis points, triggering a sharp drop in bond prices. The most striking move occurred during Asian trading hours on April 9, just before and after the tariff policy took effect, when the 30-year Treasury yield spiked sharply within two hours. This contributed to a rare and alarming scenario in the U.S. markets: a “triple sell-off” in stocks, bonds, and the dollar.

• The sharp moves sparked a wave of panic, with initial speculation pointing to Asian countries selling U.S. Treasuries in retaliation for the tariffs. However, this theory was later partially or fully denied by multiple parties. We believe there are two primary reasons behind the bond market turbulence:

  1.A weaker-than-expected auction of 3-year Treasuries, which raised concerns about the reception of longer-dated bonds. However, the final auction results were not as bad as feared.

  2.A massive unwinding of basis trades by hedge funds. These funds reportedly have over $1.1 trillion in notional exposure, concentrated in fewer than 10 institutions, making the risk profile extremely fragile.

  Data shows that the 30-year USD swap spread was significantly impacted last week, though it has begun to normalize in recent sessions. Additionally, credit spreads have tightened, and the spike in yields has not been accompanied by a substantial blowout—indicating that, for now, liquidity risk is not a primary concern.

• More importantly, this bond market turmoil revealed a critical vulnerability in Trump’s economic strategy. While he may tolerate short-term stock market volatility, he cannot afford a surge in Treasury yields. Rising yields would directly increase the U.S. government's borrowing costs, undermining his entire debt reduction agenda based on spending cuts and revenue increases. This realization marked a key turning point, culminating in Wednesday’s announcement of a tariff delay and weekend rumors of exemptions for certain sectors. In our view, although specific tariff negotiations are still ongoing, the most uncertain and damaging phase may now be behind us.

• In summary, Trump’s tariff actions are unlikely to stop anytime soon, and while a U.S.-China negotiation remains the most likely eventual outcome, it will take time. For now, the 10% global tariffs and the 145% tariffs on Chinese goods are already in full effect. What we’re seeing in the markets is primarily a sentiment-driven bottom, not yet a confirmed trend reversal. Whether a genuine rebound can take shape will depend on a recovery in earnings expectations. In the coming weeks, the earnings season—particularly the forward guidance and capital expenditure plans—will be critical indicators of the market’s true direction.

Disclaimer

• Not financial advice. Investment involves risk and may not be suitable for all investors. The price of investment instruments can and do fluctuate, and any individual instrument may experience upward or downward movements, and under certain circumstances may even become valueless. Past performance is not a guarantee of future results. This advertisement has not been reviewed by the Monetary Authority of Singapore.