The meltdown in the equity markets continues to get the lion’s share of headlines: four days straight of around 3 percent declines, the worst since October 1987, followed by a buying frenzy on Wednesday after Donald Trump said he was enacting a 90-day pause on his “reciprocal” tariffs, except for China. But forget the equity markets for the moment. The more telling signal of the coming financial calamity can be found in the bond market. Few people understand the machinations of the bond market, with its arcane argot and tendency toward inscrutability. But it’s the bond market that better telegraphs what the cost of capital will be, and how collective risk tolerances are changing, and how quickly. After all, when people start freaking out about whether they’ll get their money back, as contractually agreed by the government or by corporations, while also worrying about receiving contractually agreed interest payments, the shit really starts hitting the fan. That’s where we are now.

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Initially, after Trump’s Rose Garden tariffpalooza announcement, there was a rally in the bond market. In advance of “Liberation Day,” the yield on the 10-year Treasury fell from 4.22 percent to as low as 3.86 percent. To me, and my Wall Street sources, this swift and sizable drop in yields appeared to be nothing more than the proverbial flight to safety, a knee-jerk reaction to the mayhem in the equity markets. This is the standard investor response to exogenous shocks: Sell risky assets first, then head for the safety—or the perceived safety—of the U.S. Treasury market, and ask questions later. With the bond market seemingly moving the administration’s way, Trump’s sycophants—including Scott Bessent, the Treasury secretary, and Howard Lutnick, the compliant Commerce secretary—took victory laps over the weekend as part of their unarticulated agenda to bring down long-term interest rates. (Jay Powell, the Fed chairman, has so far resisted Trump’s entreaties to lower rates at the Fed level.) One of the theories making the rounds on Wall Street, of course, has been that the White House was intentionally nuking the stock market in order to secure lower interest rates on the refinancing of $6.5 trillion in U.S. government debt that comes due in June. According to Bessent, a 1 percentage point reduction on the interest rate of the Treasury debt saves the federal government $100 billion in interest payments annually. Worth fighting for, I guess, but at the expense of wiping out trillions in equity-market value and sending the economy into recession? I’m not convinced. In any event, that plan—such as it was—now appears moot. On Monday, the 10-year Treasury yield backed up from 3.89 percent to around 4.12—a 6 percent move in one day, and a clear signal that bond investors are getting very nervous about whatever the heck is going on at the White House. On Tuesday, it backed up even more, to 4.25 percent—a 9 percent increase over two days. By Wednesday, the 10-year Treasury was yielding 4.54 percent. (After Trump announced the 90-day pause, the yield moved down slightly, to 4.4 percent; I’m sure he was hoping for more.) “What do bonds know?” tweeted Lawrence McDonald, author of the new book How to Listen When Markets Speak and the classic A Colossal Failure of Common Sense, about the collapse of Lehman Brothers, where he was a vice president on the credit desk. “Last 20 years, large equity market risk-off events have—always—brought in ‘flight to quality’ buyers of long duration U.S. Treasuries. Not this time.” On the phone from Panama, where he lives part-time these days, McDonald told me he’s hearing a few signals from bond market investors. One is that there’s chatter that the Chinese will further retaliate against Trump’s tariffs by reducing the amount of U.S. Treasuries they buy in the upcoming auctions—which would, in part, account for the increase in yields on the 10-year. In other words, to induce our largest creditors, many of whom are foreigners, to buy our Treasuries, they are going to have to be rewarded with higher yields. China owns some $760 billion of U.S. Treasuries, and is one of our largest foreign creditors, so there are other ways the Chinese can rattle our economic cages, and they can do it quietly and without explanation. McDonald said he’s hearing murmurs from the Chinese along the lines of, “You pissed us off, maybe we’re not going to buy your Treasuries.” Our friend Anthony Scaramucci, the hedge fund manager who called Trump “boss” for 11 days in 2017, agreed with McDonald’s take about what seems to be happening in the Treasury market. “Feels like the market is pricing in foreigners boycotting U.S. bonds,” he tweeted on Tuesday morning. “Market pricing lost confidence in U.S. due to Administration incompetence.” Whatever the case, the first serious test regarding the appetite for U.S. bonds will come today, when the Treasury needs to refinance $39 billion worth of 10-year Treasuries.

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In other words, investors are freaking out about risk. And then there is the anecdotal evidence from individual corporate bonds, which paints an even more dire picture of despair, fear, and loathing. Consumer retail bonds are getting particularly hard hit. The Saks $2.2 billion bond, due 2029, moved from an already painful yield of below 17 percent on Tuesday, to a yield in excess of 19 percent by Friday. Danger, Will Robinson! The $400 million Foot Locker 4 percent unsecured notes, due October 2029, which were trading around 85 cents on the dollar, dove down to 77 cents on the dollar on Friday and now yield 9.5 percent. Another big loser last week in the junk-bond market was ACProducts Inc., a large cabinetmaker owned by American Industrial Partners, the buyout firm. In June 2023, S&P Global downgraded the company’s unsecured notes to CCC+, from B–. Since the first of the year, that bond has been trading around 60 cents on the dollar. In one week’s time, it has fallen to around 35 cents on the dollar. Yikes. Other deals are getting scuttled completely. For instance, the $1.1 billion leveraged loan to support the $1.3 billion (Canadian) buyout of Converge Technology Solutions Corp., a Canadian I.T. technology company. HIG Capital had agreed, in February, to buy Converge and merge it with one of its portfolio companies. The lenders, led by the Bank of Montreal, agreed to underwrite the deal earlier this year, and were trying to syndicate the loan, when it got pulled in the wake of Trump’s tariff warfare. It was the seventh, or so, leveraged loan deal to be pulled from the syndication market so far this year. Other recent failed deals include the attempted $5 billion refinancing of the private credit loans of Finestra Group Holdings Ltd., an Israel-based real estate concern, and the effort to refinance the $660 million high-yield bond of Chuck E. Cheese’s parent company, CEC Entertainment. A credit crunch or credit freeze, where sources of debt capital disappear as fear ratchets up, is to be avoided at all costs. Way back in the fall of 1989, when Citibank could not syndicate a loan in support of the large management buyout of United Airlines, a pall was cast across the vast credit markets. It was virtually impossible to get banks to lend or bond investors to pony up capital to support corporate financings or financings related to deals. Bankruptcies exploded. The credit freeze lasted for years, until 1994 or so. That’s why the focus of many on Wall Street is turning to the effect that Trump’s shenanigans are starting to have on the debt markets.