The markets are trying to curb the excesses of Donald Trump and we will learn in the coming weeks whether they have managed to do so.
That’s the best way to interpret the extraordinary gyrations of the past week. Plunging share prices in New York have been widely cited as the reason he postponed the imposition of tariffs on most US trading partners, bar China, and equities shot up the day after he did so.
But he was also, as he admitted, concerned by bond prices.
‘The bond market is tricky,’ he said. ‘I was watching it. But if you look at it now, it’s beautiful.’
Well, it wasn’t beautiful on Friday. The most important long-term interest rate in the world is the yield on ten-year US Treasury notes. On Monday it opened at about 4 per cent, but by Friday it had pushed above 4.5 per cent. That means there are big sellers out there – investors who don’t want US government debt.
It’s impossible to unpack the detail, but there were rumours that the Chinese were unloading their holdings and switching into gold. That would figure, given that gold is at its all-time high and the dollar is weakening.
In control?: The markets are trying to curb the excesses of Donald Trump
While we don’t know whether this will develop into a wider run on US assets, we do know the bond vigilantes are out in force.
It was James Carville, political strategist to Bill Clinton for his winning run for President, who famously coined the expression ‘the economy, stupid’. He also said that if he were reincarnated he would want to come back as the bond market, ‘because you can intimidate everybody’.
Liz Truss and Kwasi Kwarteng were insufficiently intimidated and we know what happened to them, but Trump is different. He does understand how markets can destroy property promoters – how an apparently solvent enterprise can go bankrupt if the cost of financing it shoots up.
He also knows that the dollar, unlike the pound, is the core of international trade and finance.
Roughly half of all trade is denominated in the currency and 60 per cent of the reserves in the world’s central banks are in US government securities.
So while he is playing a strong hand, he also knows the inherent weakness of the US government’s position.
At a price global investors will finance America’s fiscal and current account deficits. But that price might come in the form of much higher interest rates than the US economy or its government can bear.
Think 7 or 8 per cent ten-year Treasuries. Impossible? Well, that is where they were in the 1990s, when Trump was trying, not wholly successfully, to build his property empire.
So what does this mean for us?
For Chancellor Rachel Reeves it means it will cost more for our Government to borrow too. It may be unfair, but we have to pay a premium over the US.
Ten-year gilts – UK Government bonds – are trading on 4.75 per cent. If investors are chary about lending to the Government there is little she can do. You can understand why she is so anxious to keep the Office for Budget Responsibility on side.
For British firms, it means the cost of money will not go down to any great degree, and there is a risk it may go up sharply.
It also means there is a danger of a slowdown in such growth as we are managing.
I don’t, by the way, believe there was a jump in the economy in February, as the latest Office for National Statistics figures suggest. Expect them to be revised down when more data comes through.
For homebuyers there is a similar message: do not expect any significant fall in interest rates, especially would-be borrowers seeking a five-year-plus fix.
Maybe a slowing economy will slow inflation, clearing the way for Bank of England cuts, but, as Andrew Sentance argues on these pages, don’t count on it.
The key point is that what is happening is not just about tariffs. It is about the economic and financial policies of Trump. Big business is pushing back; big money likewise. But they are nowhere near taking control over their mercurial President.
Until they do, the rest of the world will be wary of putting too much money into America.
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