Trump Is About to Learn You Can't Spin The Bond Market

Backing off on some tariffs caused the stock market and the president's poll numbers to bounce. But price hikes from tariffs are coming, and the irresponsible tax cut bill is spiking interest rates.

Dear readers,

Donald Trump’s approval ratings deteriorated steadily during his first three months in office, with their decline accelerating after April 2 — so-called “Liberation Day” — when the president announced shockingly large global tariffs and financial markets puked in response. By April 29, his net approval rating had fallen to -10% in the Silver Bulletin average of polls — with his approval rating hitting nearly the same low point as it was at the same point in his first term, and worse than every other prior president on record.

Since April 29, the stock market has rebounded and so has the president’s polling, in large part due to his own actions (just like the decline). First, Trump announced a “pause” on the tariffs on most countries except for a 10% baseline tariff on most of the world (notably excluding Canada and Mexico, as well as Russia). Then he also lowered, for now, the tariff on Chinese imports to 30% from a prohibitive 145%. As the tariffs get smaller, they get less economically destructive, and stock prices have risen accordingly. And his approval rating has bounced back too, such that he is “only” five points underwater.

But the tariff-driven price hikes are still going to be coming for the president, politically — and now, due to the irresponsible tax-cut bill moving through Congress and the exploding deficits it is poised to create, so is the bond market. Here are some of my thoughts on the economic pain that’s coming for Republicans, and the opportunity it creates for Democrats.

We’re still waiting for the real-economy effects of tariffs to flow through to politics — and they will

The effects of the tariffs on the president’s polling, so far, appear to have been financial market effects. The president caused stock prices to crash and the public became more disapproving; he caused them to go back up again, and the public became a little more favorable. We have not yet really seen the effects of the tariffs ripple through the real economy in the form of price increases, shortages, job cuts, or overall economic weakness.

We should still expect to see those effects. While tariffs in their (current) reduced form won’t cause as much disruption to the economy as the whole plan announced on “Liberation Day” would have, tariffs remain extremely high by historical standards — higher than they have been since the Smoot-Hawley era. A 30% tariff rate on Chinese goods won’t lead to total cessation of trade with China, but it will cause trade volumes to fall and the final price of tariffed goods to rise.

Indeed, we’re just barely starting to see the price increases hit the real economy — see Walmart’s CEO publicly saying part of the tariff cost will be passed through to consumers, comments that drew complaint from the Trump administration that echoed Biden administration officials’ own complaints that inflation was really “greedflation” on the part of the companies choosing to raise their prices. Car manufacturers are also announcing price increases.¹

And we probably have not yet seen the full extent of the tariffs — Trump has continued to threaten to raise tariff rates again in a few months on countries that don’t cut the “deals” he wants, and his sector-specific tariffs on autos, auto parts, steel and aluminum may soon be joined by tariffs on semiconductors and electronics.

Spiking interest rates and a weaker dollar are serious political problems for the president

While stocks have rebounded strongly from their early April lows, the dollar hasn’t rebounded much at all. And interest rates have remained volatile — spiking in April due to tariff-related turmoil, and once again rising sharply over the last week, this time due to Republicans’ apparent intention to pass a budget reconciliation package that will add trillions of dollars to future government deficits.

You may have expected Republicans to blow out the budget, but Federal Reserve governor Christopher Waller, a Republican appointee, says market participants are surprised. “Everybody I’ve talked to in the financial markets, they’re staring at the bill and they thought it was going to be much more in terms of fiscal restraint and they’re not necessarily seeing it,” he said on Fox Business News this morning. The surprising irresponsibility of the bill is the reason that bond yields are blowing out — the government is set to borrow much more money than investors are willing to lend at the interest rates that had been prevailing, and therefore interest rates have to go up.

ChatGPT image generation

Dollar weakness and higher Treasury rates are not abstract problems for American voters. They mean less purchasing power for US consumers, higher government borrowing costs that are ultimately borne by taxpayers, and higher private borrowing costs that will make it harder for businesses to invest and grow and harder for consumers to buy homes and vehicles. Thirty-year mortgage rates are benchmarked to the 10-year treasury rate, and average mortgage rates have risen back above 7% again with the 10-year bouncing back above 4.5%.

Importantly, the reconciliation bill’s impact on interest rates goes beyond what you might expect just from looking at the CBO score. In theory, the bill only expands budget deficits by about $3.3 trillion over the next decade. But it contains many temporary tax cuts that Republicans really intend to make permanent. If all the provisions were permanent, the cost would be over $5 trillion. Meanwhile, many of the spending cuts are postponed to the future. If those cuts are further delayed or canceled — as often tends to happen — the deficit impact will be even higher. And the CBO bases its estimates on an expectation that the 10-year treasury rate will settle somewhere below 4% on average over the course of the ten years. If rates are higher — as currently looks likely; as of this writing, the 10-year is yielding 4.59% — then deficits will be bigger still.

Bond market participants are aware of that math and are unlikely to be swayed by rosy projections from the president’s economic advisors. As former Biden White House economist Martha Gimbel writes, you can produce whatever economic projections you like, but “you can’t spin the bond market.”

Another ChatGPT image generation. They were both so good, I couldn’t choose!

Democrats must claim the mantle of fiscal responsibility

The twin policy disasters of the tariffs and the deficit-ballooning fiscal package give Democrats an opportunity to weave together one unifying message about how Republicans are failing on the economy: They’re (1) cutting Medicaid and (2) raising taxes on the products you buy every day to (3) pay for tax cuts for wealthy people and corporations while (4) running up huge budget deficits that (5) push up interest rates on mortgages and car loans.

That message is probably good enough for 2026. The harder question is what message Democrats need to run on in 2028.

An unfortunate reality about the deteriorating fiscal picture and the global surge in yields on long-term government bonds is that the deficit has become really, substantively important again in a way it hasn’t been in more than 30 years. Democrats need to convince voters that — unlike Republicans — they can control inflation and bring interest rates down so our economy can grow and the American dream can be accessible. That’s going to require quite a lot of deficit reduction, which means fiscal austerity.

Democrats would be wise to look back to the 1992 presidential campaign: the last presidential election in which interest rates were a major defining issue, and the last time a Democrat ran for president on a semi-austere fiscal platform. All three candidates ran on promises to bring down the deficit and borrowing costs. Bill Clinton contrasted the Republican record — tax cuts for the rich, large budget deficits, and stagnant wage growth — with his own plan to reduce the deficit by taxing high earners and corporations, controlling health care costs and shrinking the military after the Cold War. He was highly cognizant of how bond investors looked skeptically at the possibility of a Democratic president, and he focused explicitly on not spooking the bond market in a way that could spike rates. And when he became president, he actually sharply reduced the deficit, creating space for interest rates to fall and the economy to grow.

What Bill Clinton could not do, in the fiscal environment of the early 1990s, was implement large new government programs. In order to move deficit reduction to the top of the agenda, Democrats will have to drop the Christmas tree approach that drove the Build Back Better Act and the broader liberal politics of the Trump-Biden era. There will be no new major federal benefits for child care or elder care; we cannot afford it — not in this interest rate environment. Democrats will still need to run on higher taxes on corporations and rich people, but the proceeds will need to go to cutting the budget deficit.

Of course, “I’m going to raise taxes and have no big new programs to show for it” is not a super compelling political pitch. But Bill Clinton found a way to make it work, and after a hiccup in the 1994 midterms (and despite some scandals along the way) he achieved strong economic growth, re-election, and sustained high popularity. You can, in the end, be rewarded for cutting the budget deficit if the prevailing economic conditions mean doing so will benefit consumers. We’re now in such a time again.

Very seriously,

Josh

1. Note also that the price increases induced by tariffs need not be limited to imported goods. When tariffs make imports more expensive, they create space for domestic producers to raise prices because of reduced competition from foreign peers. Just a few days ago, I was at my local wine shop, talking with the owner who said his distributors were telling him about their intentions to raise prices on some California wines as a way of offsetting the cost of tariffs on European imports.