Fynsa
In the last few weeks, the United States has experienced a great lesson in who has the real power in the global economic system. It is not the White House. It is not Wall Street. It is the bond market.
Everyone is watching Trump's trade offensive against China and the world, with tariffs that sought to reindustrialize the country and reduce strategic dependence on Beijing. The argument seems very valid, as the U.S. has lost ground in several key sectors.
However, the mistake is not in the substance, but in the form. Tariffs were implemented in disarray, without coordination with the rest of fiscal or monetary policy. The stock market reacted first, with a significant drop. But the real problem came from Treasury bonds.
In just three days, the 10-year Treasury rate rose from 4.20% to 4.50%. This is not a simple correction, it is a message from bondholders, those institutional investors who demand higher yields when they detect more exposed fiscal or monetary policies.
Why was it so bad? Because Treasury bonds are the anchor of the global financial system. Banks, funds, insurers and governments build their balance sheets and decisions on them. When bonds fall in price (and yields rise), the whole system begins to creak: mortgages become more expensive, investment slows, corporate margins deteriorate and capital flows tighten. And this is happening just when the Treasury faces an intensive maturity schedule, and when its two largest foreign holders - China and Japan - are facing a tightening of their maturity schedules.China and Japan- have begun to reduce their positions. The market knows it. And it is reacting.
That is why there is talk of recession today: the U.S. fiscal deficit is projected at $1.9 trillion by fiscal year 2025, with an upward trend in the following years. A growing deficit means that the government must issue more debt to finance its spending, which could increase interest rates and, consequently, financing costs. This creates a vicious circle: higher rates. ➝ higher debt servicing costs ➝ higher deficits ➝ more rate demands from investors.
This episode leaves us with a lesson: the real power is not in Washington or New York. You can't challenge the bond market without consequences..
And in a world of fiscal deficits in excess of $1.9 trillion, inflation and a leveraged financial economy, that power will continue to grow.
Trump thought he controlled the narrative, but the narrative is dictated by whoever controls the cost of capital. And that, today, is not in the White House.
