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In isolation, you’d think that a sudden halt for President Trump’s tariffs would be warmly welcomed by the market. US stock prices did move higher right out of the gate...but then pulled back to relatively unchanged. The initial reaction of the 10-year Treasury yield also posed an interesting thought experiment.

Even following news of the stay that would put tariffs temporarily back on, the S&P 500 and Nasdaq 100 finished the day with only minor gains. Plus, the VIX barely moved. That suggests the market largely took the developments in stride. It also suggests that easing trade tensions and the unlikelihood of more punitive tariffs sticking were already largely priced into the market.

As for Treasuries, reduced tariffs should be disinflationary. So, why were long bond yields still rising?

10-Year Treasury Note Yield

It could have been an initial risk-on reaction by the markets - stock prices jumped at the open, so bond prices fell. It could have also been because the markets were still focused on the federal debt and the implications of it.

Here’s the case: If the Trump tax cut bill eventually passes, it will put pressure on the national debt and boost federal budget deficits. The tariffs would have brought another income source to the equation and potentially offset some of the fiscal strain introduced by the bill.

If tariffs are off the table, that should, in isolation, amplify the fiscal impact of the bill on the debt and deficits. Perhaps the bond market reacted to that by pushing yields higher on the belief that there might be less confidence in dollar-denominated assets ahead.

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