- U.S. equity markets lost roughly $1.5 trillion after President Trump announced sweeping punitive import duties, but the administration is more interested in bringing down borrowing costs to stave off a potential sovereign debt doom loop.
When President Donald Trump unveiled a spreadsheet detailing all of the punitive tariffs he intended to impose on the rest of the world late Wednesday, investors knew what to do: bolt for the exits.
Futures contracts on the S&P 500 and Nasdaq 100 fell sharply after markets learned that the United States will impose an additional 34% tariff on Chinese goods beginning next week, in addition to 20% on those from the European Union and 24% on those from Japan. Former Harvard economist Lawrence Summers estimated that approximately $1.5 trillion in market value was lost in the span of an hour.
Despite being able to trace the equities futures sold off to this point, administration officials dismissed the after-hours movement and blamed the stock price drop on DeepSeek, the open source AI model from China that shattered tech valuations in January.
“What I would point out is that the Nasdaq peaked on DeepSeek day,” Treasury Secretary Scott Bessent said on Bloomberg TV Wednesday. “So that is a MAG-7 problem , not a MAGA problem.”
Not true, according to Saxo Bank’s global head of investment strategy, who attributes bearish sentiment in everything from Amazon to Nike to a once-in-a-century increase that raises the average effective import duty by nearly 19 percentage points.
“In what President Donald Trump labelled a ‘Liberation Day’ for the American economy, April 2nd saw the unveiling of the broadest and most aggressive tariffs imposed by the United States in over 100 years,” tweeted Jacob Falkencrone on Thursday. “Markets around the globe reeled in response.”
Debt refinancing tsunami
Bessent’s reaction may not be merely an attempt to avoid uncomfortable questions about the S&P 500 index’s six-month low. There are additional reasons why the White House may want to divert voter attention away from equity markets.
The former hedge fund manager has stated that he wants the benchmark 10-year Treasury bond to serve as the new litmus test for the health of the US economy, from which the larger credit market—including car loans and home mortgages—is broadly priced.
The lower the yield, the more affordable borrowing becomes for both Americans and Uncle Sam. This is critical because Bessent inherits from his predecessor a crisis that Wall Street veterans such as Stanley Druckenmiller have blasted as tragically myopic.
The Biden administration’s decision to roll over much of its debt in notes with short maturities, such as Treasury bills, has resulted in a tsunami of debt that Bessent’s department must refinance this year without breaking the bank.
Preventing a U.S. debt market doom loop
Interest payments on the national debt have already surpassed annual defense spending, totaling $1 trillion last year. A significant increase from the current level could trap the United States in a vicious cycle in which it must borrow more and more money at ever-increasing interest rates simply to service its debt.
Trump and Bessent have made it clear that they want to break the vicious cycle by lowering borrowing costs on long bonds, which are the part of the yield curve over which the Federal Reserve has little control. While this may harm stocks in the short term, the alternative could be much worse.
Billionaire investor Ray Dalio, founder of the macro hedge fund Bridgewater, has given policymakers three years at most to address the growing US debt problem before risking a buyer strike the next time they try to issue sovereign bonds.
So far, Bessent’s plan seems to be working. Markets are pricing in the growing possibility of a recession after Trump’s punitive across-the-board tariffs.
Along with buying gold, investors have piled into US debt, lowering the 10-year yield from 4.80% to 4.08% in less than three months.