Apocalypse Delayed?

What Happened in the Bond Markets and What's Next

Jeremy Irons in Margin Call

Three months ago, speaking to Quinn Slobodian and

Max Read

, I proposed that the market might be the only remaining form of rationality and therefore the only thing that we might be relying on to temper Trumpian madness. Now, as a person whose scattered thoughts on economics are shaped by the traditions of Keynes and Marx, this is not a particularly hopeful idea. I don’t happen to think the rationality of the market is very rational at all. As a Keynesian, I think it’s a nearsighted beast that lurches from panic to greed and it makes investment decisions that bear on the livelihood of all of us as if a drunken frat boy gambling in a casino. As a Marxian, I think it builds a fundamentally irrational and unstable system that tends towards crisis, like for instance, empowering a set of impulsive and not particularly wise oligarchs to lord over all of us.

Nevertheless, at least the market is something that’s not just just Trump subjective whims: it’s part of what Hegel called Objective Spirit, the collective instantiation of social coexistence, along with the family and the state. And it was the most terrible of all markets, the bond market—the market for US government debt—that managed to put the fear of God back into Trump. As the New York Times reports:

Mr. Bessent played a significant role in steering the president toward the pause. But the real credit, Mr. Trump’s advisers admit privately, should go to the bond markets. Mr. Trump’s decision was driven by fear that his tariffs gamble could quickly turn into a financial crisis. And unlike the two previous crashes of the past 20 years — the global financial crisis of 2008 and the pandemic of 2020 — this crisis would have been directly attributable to only one man.

So, what actually happened in the bond market? On Tuesday night, it looked like it might be the start of armageddon. US Treasuries are supposed to be the most boring thing in the world, a dependable investment that investors fly to when stocks are looking shaky: the notion is that the US will always honor its debts and you will always be able to find a buyer; They are safe and liquid. As a result, they are also generally not an asset class where fantastic profits were to be made through speculative wizardry. But hedge funds and asset managers, in their infinite cleverness, found a way to make trading US Treasuries both incredibly lucrative and potentially risky. Highly simplified, this involves using a ton of leverage, i.e. borrowing, to magnify the tiny margins you get from trades involving boring old Treasuries. But if something gets choppy in the market suddenly those lenders come demanding collateral and that collateral quickly gets more onerous and harder and harder to raise. Fund managers panic sell to meet these collateral demands, crashing the market and making Treasuries, the most safe and liquid asset, suddenly unsafe and illiquid. So, the asset class that represents the safety of the United States as a set of institutions gets iffy and systemic risk ensues.

One time this exploded was the Long Term Capital Management crash of 1998, when one highly-leveraged hedge fund almost brought down the world financial system. The other time this almost exploded was in March 2020 with the COVID crash. As Financial Times’ Alphaville helpfully explains,

The problem is that both Treasury futures and repo markets demand much more collateral when there is an unusual amount of volatility in the Treasury market. And if the hedge fund can’t pony up then lenders can seize the collateral — Treasury bonds — and sell them into the market. As a result, it is a major danger lurking inside the market that is supposed to be the financial system’s equivalent of a bomb shelter. We saw this most memorably in March 2020, when it took almost $1tn of Treasury-purchases by the Federal Reserve to prevent the US government bond market from exploding. We are not nearly there right now, but there’s been a similar “doom loop” of margin calls, liquidation and falling prices in recent days.

What would happen if the “doom loop” started? Well, presumably the Federal Reserve would then step in like they have in the past, a proposition which many argue just makes the traders more likely to engage in highly risky behavior.

Another theory is that the chunkiness in the bond market was because Japanese traders started dumping US debt overnight, but the only source I’ve seen for that is Fox News’s Charlie Gasparino, so buyer beware. In any case, I think Bessent was finally able to impress upon Trump that they had started the financial version of a chain reaction.

Where does this leave us? Who knows. As I write, the yield on the U.S. Ten Year Treasury is inching back up. (Yes, that’s bad.) The fact is that this is barely even a climb down from his insane trade policy. In fact, it’s not even right to call it a “policy” at all because it changes so quickly and so arbitrarily. We still have basically an embargo on China and a very high 10 percent tariff on everyone else. The effects of these duties are going to start to be felt in the real economy very fast and people get bills. It’s small businesses that will suffer the most: they are locked into global supply chains and do not have the flexibility or power to quickly alter their position within them. This makes the enthusiasm of some petit bourgeois businessmen for Trump more than a little pathetic. In Marxian thought, tariffs accelerate the concentration of capital and the creation of oligopolies and monopolies. It’s imputing too much intent and strategy to say this is the point, but it’s noting that Trump-backer Peter Thiel is an open monopolist and the first Trump administration worked on behalf of big business. As the Economic Review put it in 2020:

When Trump adopted a populist platform and actively condemned the Time Warner merger, many assumed he would take on big business. Makan Delrahim – Trump’s appointee to the DOJ’s Antitrust Division – has been quite vocal about bringing down big tech; however, he has yet to take significant antitrust action. Even more problematically, his “amicus programme”, where justice department lawyers are increasingly inserting themselves into antitrust litigation to advise judges how to rule has skewed America’s litigation in favor of big business. Whistleblowers from the DOJ report that not only has Delrahim encouraged them to side with entities like his former employer Qualcomm, but is using the DOJ’s power for politically-driven litigation on cases like marijuana industry mergers that possess little actionable threat to competition in their industry. Fearing no legal consequence, larger companies become more predatory hurting innovative small startups.

Further deregulation – like in the case of net neutrality – and administration backed op-eds titled “Competition is for Losers” warrant doubts on the Administration’s position against monopolization. Justin Talbot-Zorn, a senior adviser at the Center for Economic and Policy Research, concludes Trump’s approval of the Sprint/T-mobile merger and backtracked position on the AT&T/Time Warner prove his administration has “adopted Peter Thiel’s [endorsement] of [less] competition and concentrated power”.

In fact, the policy of the first Trump administration became explicitly pro-monopoly. In 2020, the Economic Report of the President dismissed the growing policy literature on breaking up big firms and concluded: “Concentration may be driven by economies of scale and scope that can lower costs for consumers. Also, successful firms tend to grow, and it is important that antitrust enforcement and competition policy not be used to punish firms for their competitive success.” Maybe the Trump people are hoping that a mass small business extinction will eventually result in lower costs for consumers that will offset the tariff spikes as a few great American national champions will replace the chaotic market patchwork of middlemen and tiny firms? his vision that is pretty Thielian, for what’s worth. Obviously, it’s also insane on several levels and I’m not sure they’ve thought it through that much.

To go back to the beginning, there is a limit in Trump’s project of total consolidation and concentration, there are other centers of power. Unfortunately, they are not particularly democratic ones and they can be manipulated and cowed in various ways, but he is still not the only game in town. Probably a lot of rich and powerful people have noticed that, too.