A key Treasury auction this week could test one of the central planks of President Donald Trump’s tariff strategy as markets reel amid the largest swings in Treasury yields in more than two decades.
President Trump has insisted that his imposition of sweeping levies on goods imported from virtually every nation, paid for by American companies and consumers, will ultimately benefit the domestic economy with lower interest rates, even as they slow growth and stoke inflation along the way.
The Federal Reserve, meanwhile, wants to see more evidence of their impact on the world’s biggest economy over the coming months before committing to a change in interest rates, which currently sit between 4.25% and 4.5%.
The President is finding some success in lowering market interest rates so far, which most investors view through the 10-year Treasury bond yield, although economists see that movement as a reflection of recession risk rather the tariff success.
Benchmark 10-year-note yields started the year at around 4.577%, according to Tradeweb data, and fell below the 4% mark last week for the first time since Trump was elected in November.
U.S. mortgage rates, however, have fallen only modestly over the same period, from around 6.97% at the end of last year to around 6.7% earlier this month.
Treasury Secretary Scott Bessent has said the Trump administration in focused on lowering 10-year Treasury bond yields. They’ll need foreign investors to do it. Bloomberg/Getty Images
Bond market movements this week have been chaotic, with 10-year paper reaching a multiyear low of 3.87% in overnight trading on Monday, before rising to 4.21% during the heaving volatility that dominated markets, and nudged to 4.244% on Tuesday.
Those intraday moves, in fact, were the largest in 25 years, according to Tradeweb data, and they likely represent a host of market risks heading into the April 9 start date the president has set for what he calls his ‘Liberation Day’ tariffs.
That date, however, also corresponds with the sale of around $39 billion in 10-year notes, the middle of three coupon auctions that will raise around $119 billion for the Treasury this week.
The overlap is key because foreign buyers play a crucial role in these auctions by holding down borrowing rates and helping finance the current government deficit, which topped $1.147 trillion in February and could rise to as high as $2 trillion by the end of the financial year in September.
Last month, indirect bidders, which are comprised mostly of foreign central banks, took down around 67.4% of the $39 billion 10-year auction and scooped up around 71.5% of a $42 billion sale in February.
A host of reasons explain foreign buyers’ attraction to U.S. Treasury bonds, including the dollar’s status as the world’s reserve currency, the ironclad safety of the bonds themselves, and the role that U.S. interest rates play in calculating the value of financial assets.
But there is another determining factor is the role that global trade plays in the demand for U.S. Treasuries, which helps keep borrowing costs low and enables the government to continue running budget deficits while piling on new debt each and every year.
Overseas companies selling goods into the U.S. are paid in U.S. dollars and typically swap those dollars with their own commercial banks, which then do the same with the country’s central bank.
A good portion of those dollars then find their way back into the U.S. in the form of investments in plants, manufacturing, research and marketing. But they also flow into Treasury bond auctions.
In fact, the biggest holders of U.S. Treasuries — China and Japan — have run the largest trade surpluses over the past two decades outside of the European Union collective.
Now, however, with the Trump administration planning levies north of 50% on China and threatening even steeper duties soon, and with tariffs set to kick in on Europe, Canada and a host of trading partners on Wednesday, can those flows into the Treasury market continue?
If they can, Treasury bond prices are likely to increase and Treasury bond yields (a loose proxy for government borrowing costs) are likely to decline.
If foreign buying of U.S. debt recedes, however, as a result of slowing trade flows or what might be called a buyer’s strike from foreign central banks, the administration’s goal of lowering market rates will find an immense challenge.
And that challenge will come at the worst possible time: Not only is U.S. debt rising past $36 trillion, on course to top $50 trillion over the next few years, but the current debt-ceiling standoff could trigger payment and default risks as early as this summer if Republican lawmakers don’t reach a deal in coming months.
Foreign buyers, meanwhile, might not be as keen to finance the $5.4 trillion in tax cuts the Trump administration is seeking if, at the same time, their access to U.S. markets is limited by tariffs and they’re threatened with new and unpredictable levies if they dare to impose reprisal duties.
However America’s trade deficit is viewed politically, it has allowed congressional lawmakers to avoid difficult tax and spending decisions.
Turning off the tap of foreign bond buyers, while planning to borrow trillions more on an economic gamble, might be a bigger risk to U.S. growth than the tariffs themselves.
