Kay McCarthy, Head of Jersey Office at The International Stock Exchange (TISE), examines the powerful entity that is the global bond market and discusses why it is so important for the global economy.

Back in February 1993, James Carville, former political advisor to President Bill Clinton, made his now famous comment to the Wall Street Journal: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody.”

Carville’s famous remark speaks volumes about the immense power the bond market has over governments and economies. This power was clearly demonstrated in early April, when a dramatic clash between US policy decisions and market forces played out.

In April, US President Donald Trump’s administration announced a set of aggressive new tariffs targeting numerous trading partners. The reaction in financial markets was fast and severe. Stock markets plummeted, but the real drama unfolded in the US Treasury bond market where treasury bonds sold off sharply. US 10-year Treasuries experienced their worst week in almost 25 years.

"The bond market can impose constraints on governments far more effectively than any political force..."

The sell-off in bonds was so unsettling that it unnerved the administration and confidence in the US economy fell quickly as investors sold their positions in US government debt. With US and global financial markets tumbling, President Trump abruptly reversed course and suspended tariffs on dozens of countries for 90 days, acknowledging that the bond market was getting a little bit ‘’yippy’’.

The bond market can impose constraints on governments far more effectively than any political force and this episode served as a stark reminder of that. Through the collective actions of global investors reacting to perceived risks, the bond market can indeed “intimidate” and force rapid policy reversal.

Not the first time

This was not the first time governments were forced to abandon policies because the bond market revolted and was by no means the first time an American president blinked in the face of bond investors expressing alarm over policies.

In the mid-1990s, when Carville made his quip, bond traders became frustrated with the huge government spending that initially occurred under the Clinton administration, driving yields up. Once Clinton did away with plans for national health insurance reform and pushed a series of more conservative policies, bond yields fell. 

Just a few years ago in the UK, a mass sell-off by currency and bond traders forced the government to abandon its plans for monumental unfunded tax cuts at a time when the national finances were already under pressure. This resulted in the resignation of the Chancellor of the Exchequer Kwasi Kwarteng followed shortly by the forced resignation of Prime Minister Liz Truss  after just 45 days in office. 

Why is the bond market so important?

The market for bonds depends on two key metrics. One is the price, which is what someone will pay to buy a bond and the other is the yield, which is the bond’s return on investment.

In the bond market, prices move inversely to yields, as the bond price goes up the yield comes down. When bond yields rise, the cost of every other type of borrowing such as credit cards, mortgages, business loans and the financing of government debt, increases. When it becomes more costly for the government to borrow, it is more costly for firms and households to borrow.

""In the bond market, prices move inversely to yields, as the bond price goes up the yield comes down."

Higher borrowing costs make it more difficult for companies to invest and expand, and harder for consumers to pay for the things those companies produce, from groceries to new homes. This can become a vicious cycle which is why the actions of the bond market can profoundly shape global economies.

The sharp sell-off in US Treasury bonds on April 9 led to a spike in yields, signalling investor concerns over the aggressive trade policies and their potential to increase inflation and government borrowing. It was this bond market turmoil that forced the spectacular U-turn by President Trump as he rolled back his tariff escalation.

Nervousness continues with the ‘’Big, Beautiful Bill’’

US Congress is currently weighing President Trump’s “Big, Beautiful Bill,” a budget reconciliation bill to fast-track policy around spending, revenue, and the debt ceiling. It is estimated the tax cut bill would increase the deficit by at least US$3 trillion over 10 years.

This is a sizeable increase in an already substantial debt burden and markets are responding accordingly. Interest rates are heading higher, especially once adjusted for inflation.

On May 20, a sale of 20-year US government bonds saw weak demand at auction, sending rates higher still. Demand for the bonds was the lowest since February, according to the US Treasury Department. Investors who bought the bonds sought a higher-than-expected yield, effectively saying they wanted to be paid more for taking on the risk of lending to the government.

That will have sent a warning to President Trump’s administration. The poor demand means that investors who lend money to the US think the administration’s agenda, and the “Big, Beautiful” tax cut bill, has made the US a much riskier investment. 

The bond market is already on edge, the question now is will the ‘‘yippy’’ bond market scare the administration enough to change the “Big, Beautiful Bill” as it moves through the Senate, making this tax bill much more costly for the US government and economy. Its ability to do that could be decisive in deciding where the legislation goes from here.

This article was originally published in the Jersey Evening Post, June 2025.