Donald Trump’s tariff hammer has set the bond market into violent oscillations. Even safe havens like US Treasuries come under pressure, while the flight into gold, Bitcoin, and reserve reallocations signals growing risk aversion.

The cracks in the foundation of the financial architecture are not new—Trump has merely laid them bare. Do we stand at the beginning of a credit crisis?

When the collateral of a loan—such as U.S. Treasuries—loses value drastically, the debtor faces a margin call from the lender, that is, the dissolution or recalculation of the loan contract, followed by a possible liquidation.

This is tragic in individual cases; on a macroeconomic level, a crisis of the collateral can lead to system collapse. What we experienced last week in the global bond markets recalled the Great Financial Crisis a decade and a half ago. Viewed from a broader perspective, a growing loss of confidence among lenders in the creditworthiness of debtors—in this case, the United States—translates into liquidation panic.

Everything presses through the same exit simultaneously. Thus arise airpockets, markets without demand capable of cushioning price plunges. Such a great inflection point is typically preceded by times of high volatility, as we now observe in the markets.

From the waves of volatility, safe havens like gold or even Bitcoin come into the sights of investors and savers. They offer protection against the default risk of third parties—an argument that will likely see a special boom given the global debt acceleration.

The Effects of the Trade War on the Bond Market

The trigger of the current volatility was cracks in the so-called basis trade, a strategy where investors bet on price differences between US Treasuries and their futures to secure safe profits. That this was catapulted out of its modeled safety was surely due to the escalation of the trade war between the USA and China. It unleashed massive swings in the markets and drove risk premiums upward.

Resulting recession fears also crashed the oil price, the economic barometer par excellence, below $60 per barrel. Since the start of the year, oil is thus about 25 percent lower—good for consumers, but an ill omen for the global economic outlook, which darkens the longer the conflict between the two superpowers persists.

Recession Fears All Around

Economic heavyweights like China, Germany, or the United Kingdom are already in recession. China fights with massive stimulus programs and an increasingly expansive monetary policy against its demographically induced deflation.

The collapse in the real estate market still weighs heavily on China’s banking sector, which struggles to implement Beijing’s lending mandates in an increasingly defensive economy. And always keep in mind: China’s party leadership marches into this crisis with a rucksack of 330 percent state debt—a burden we don’t even know from highly indebted countries like the USA with 120 percent or Italy with 140 percent state debt load.

The Tower of Babel debt may reach vertiginous heights. Yet it waits only for the moment when gravity prevails, and politics must dismantle the upper floors.

Reordering With Pains

Has the USA thus chosen a perfect moment to rein in China’s aggressive export policy (Its surplus is nearly one percent of lobal GDP)? That a reordering of the global economy would not proceed without pains on the home front must have been clear to the protagonists around President Trump and Treasury Secretary Scott Bessent beforehand.

And the pain followed on the heels of the tariff storm: exchanges sold off massively, the US standard index S&P 500 lost at its peak about 15 percent of its capitalization since “Liberation Day”. But what particularly caught the eye was the pressure on US Treasuries.

They have long been considered a safe haven for investors of all stripes when the world is in flames. The yield of 10-year Treasuries rose at times last week by 40 basis points—fueled by sellers from various directions. Is it China, selling off its $700 billion Treasury hoard to exert yield pressure on the USA?

Is it those investors fleeing into liquidity amid growing geopolitical uncertainty and unwinding their basis trade positions? Or is it, in the end, the Europeans who have joined China’s attempt to shed US Treasuries, to increase pressure on the USA to relent in the trade conflict?

USA Before a Complicated Refinancing Round

It is quite possible that everything is now being tried, if need be in coordination with Beijing, to restore the status quo ante and drive up the USA’s refinancing costs. Treasury Secretary Bessent faces the Herculean task this year of rolling $9.2 trillion in debt into the future—low interest rates would be opportune, but they are increasingly out of reach.

Bessent emphasized on Thursday before reporters that he saw nothing unusual in the markets—a bid to calm markets and investors. Calm in the markets is fundamental to gaining the upper hand in the trade war with China.

The increasingly financialized economy, as well as the savings plans of millions of US households, show too little resilience against deep corrections. The Treasury Secretary also relies fiscally on stock market gains—they bring him over $200 billion annually.

Location Renovation Under High Pressure

The conflict parties remain steadfast: the USA deepens trade alliances through tariff pressure, China protects its export market. Trump bets on re-industrialization and “America First,” with tax cuts and deregulation, to strengthen Blue Collar America, for here the coming elections will be decided.

Trump stakes his fight among geopolitical giants on the attractiveness of the American economic location and its ability, under high pressure, to transform capital into real business models and new jobs. The announced tax cut should reinforce this impression, especially since the Trump administration strives to tame the bureaucratic jungle with a large machete.

Trump has unmistakably tied his political fate to the re-industrialization of the United States. It’s about reviving the economic opportunity space of the people and freeing the country from industrial paralysis.

What Happens Next?

We become witnesses to the great political volte-face in the USA—dismantling state bureaucracy, the comeback of private enterprise. Can this succeed? Is it possible to break this deeply rooted narrative of the indispensable Father State, if need be at the cost of short-term stability bought with ever-higher debts?

The pressure to act weighs heavily on all sides given the accelerating debt spiral; an end to the trade war is, for now, hardly to be expected. A word on Europe: Brussels signaled willingness to lower its own tariffs in American trade.

Still, there’s no talk of eliminating the core of European protectionism, the countless climate mandates and harmonization rules, to give the economy breathing room. Yet it is precisely this bureaucratic labyrinth that deters investors from engaging on the old continent, defended tooth and nail by strong EU lobbies.

We must wait to see whether the pressure on global trade generated by the USA translates into better economic conditions or whether we have merely entered another cycle of instability.

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Thomas Kolbe, born in 1978 in Neuss, Germany, is an economist and freelance journalist with over 25 years of experience as an author and media producer. Specializing in economic processes and geopolitical events from a capital markets perspective, his work reflects a libertarian philosophy centered on individual self-determination. He studied in Düsseldorf and Cologne and has served as a speaker for the German Small and Medium-Sized Business Association (BVMW).