The U.S. bond market has experienced rapid and substantial upheaval in 2025 as a direct result of the latest tariff policy developments. When the administration announced sweeping reciprocal tariffs on April 2, bond prices fell sharply and yields surged-most notably, the yield on 2-year Treasury notes rose by as much as 0.3 percentage points in a single day, marking the largest intraday move since 2009.
This reaction signaled that investors were dumping U.S. government bonds, a classic move by so-called "bond vigilantes"-investors who protest fiscal or monetary policy by selling bonds to drive up yields and borrowing costs.
Bond vigilantes actively pushed back against some of Donald Trump’s policies, particularly his aggressive tariff measures. In April 2025, a steep selloff in U.S. Treasury bonds-driven by these investors-sent yields soaring and increased borrowing costs for the government.
After Trump announced aggressive tariff measures and signaled potential fiscal expansion and tax cuts, bond vigilantes responded by selling off U.S. Treasury bonds, causing yields to jump sharply-from 4.290% to 4.425% in a single day. This surge in yields reflected market concerns about the administration's policies and increased the government's borrowing costs. This market reaction signaled strong disapproval of the administration’s tariff escalation and fiscal approach.
The pressure from bond vigilantes was significant enough that President Trump announced a 90-day pause on many tariffs, acknowledging that turmoil in the bond market had influenced his decision. While Trump had previously dismissed stock market declines, he publicly noted that he was closely watching the bond market and that the selloff made him reconsider his tariff strategy.
Bond vigilantes set up their trades primarily by selling government bonds or taking short positions in the bond market when they perceive fiscal or monetary policies as inflationary or irresponsible. Here’s how they typically execute these strategies:
Direct Selling: They sell large amounts of government bonds, which pushes down bond prices and drives up yields (interest rates), making it more expensive for governments to borrow.
Shorting Bonds: Many bond vigilantes use short-selling strategies, betting that bond prices will fall and yields will rise. This can be done by borrowing bonds and selling them in the market, hoping to buy them back at a lower price later.
Using Bond ETFs: Traders may also short bond-focused exchange-traded funds (ETFs), such as TLT (which tracks long-dated U.S. Treasuries), as a way to express a bearish view on bonds and amplify their impact on yields.
Derivatives and Futures: Some vigilantes use bond futures or interest rate swaps to profit from rising yields or to hedge their exposure while signaling disapproval of government policy.
Swap Spreads: In the context of the bond market, swap trades typically refer to interest rate swaps, where investors exchange fixed and floating rate payments, or to “basis trades,” which exploit price differences between Treasury bonds and interest rate swaps or futures contracts.
When bond vigilantes sell large amounts of government bonds, it can cause bond prices to fall and yields to rise. This selling pressure can also affect swap spreads-the difference between the yield on a Treasury bond and the fixed rate on a comparable interest rate swap. During recent episodes of policy uncertainty (such as tariff announcements), swap spreads have tightened sharply, indicating intense selling of cash bonds and shifts in swap market dynamics.
Many hedge funds and institutional investors engage in basis trades by buying cash Treasury bonds and simultaneously selling Treasury futures or entering into swaps, betting that the price gap (the “basis”) will narrow. These trades are often highly leveraged, sometimes up to 100 times the original investment.
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