Rates Plummet, Then Shoot Higher! MAGA Myths Too
Over the weekend, the 10-Year Treasury yield fell to 3.88%, and the mortgage world was rejoicing.
But today, rates are shooting back up — with the 10-year hovering around 4.1% as I type this blog.
What makes this scary/interesting is that stocks are still tanking.
And usually when stocks tank, the “giant pool of money” in stocks gushes into bonds — resulting in lower rates.
In any case, a 20-basis-point bump (2/10 of a percent) increase in 10-Year yields in less than a day is highly unusual and a reminder of just how volatile and on edge the bond market is.
Rates fell so far over the weekend because of trade war concerns, as investors plunged out of stocks and into bonds.
Rates shot higher today because of (1) rumors that the trade war might be easing; (2) possible mass selling of bonds by foreign holders of bonds; and (3) concerns about inflation.
Two things: (1) Expect a lot more volatility, making rate quotes all but worthless after a few hours, given how quickly rates can change in markets like this; (2) this is why it is very dangerous to quote rates over the weekend too, as rates can often change significantly when the markets officially open on Monday morning.
Two Non-MAGA Myths: (1) Foreign Countries Sell Bonds Because They Don’t Like America; And (2) Tariffs Cause Inflation
As a reminder, foreign countries don’t sell bonds because they don’t think America is a good investment. They often sell bonds simply because they need to raise cash to buy dollars to service debts and import food and energy.
In addition, it’s a myth too that tariffs cause inflation, per Jim Rickards, for a few reasons. First, the primary cause of inflation is an increase in the money supply, and tariffs do not increase the money supply. Secondly, most consumers can’t afford to pay higher prices, so they will shift spending habits instead of paying more. If consumers could afford higher prices, per Rickards, retailers like Walmart would have already raised prices.
MAGA Myths
- The lag effect does not exist when job numbers are strong. Mr. Trump and his team were touting the strong jobs numbers last week, and I had to laugh. This is because they are the same crew making the case that this is and will be Biden’s economy for at least a year (a case I make often too because the “lag effect” is real). If there was any hiring this soon into Mr. Trump’s administration, it was only because employers were front-running the tariffs, per Jeff Snider, selling as much inventory as possible before tariffs were imposed.
- Tariffs will result in a substantial increase in government revenues. Supply-siders love to remind us that tax increases rarely result in the amount of revenue increases that politicians expect, because the tax increases impact economic behavior. Similarly, tax cuts often do not result in expected revenue decreases either. And this has been borne out by the data time and again.But the supply-siders in Mr. Trump’s cabinet seem to forget this when they project revenues from tariffs. Tariffs are a tax, and they will impact behavior, so it is very unlikely that they will generate the revenues that many in Trump’s cabinet are predicting.In addition, tariff revenues will be even less if the tariffs result in foreign countries moving production into America, as Mr. Trump is predicting (and as we see taking place now).
Originally published at https://www.jvmlending.com on April 7, 2025.
