Tariffs, U.S. Debt, and the Bond Market

The world economy is caught between protectionist tariffs, a ballooning U.S. debt load, and rising fears of political interference in monetary policy.

Recent developments suggest that markets are bracing for uncertainty, and the U.S. bond market sits at the center of this storm.

The World Trade Organization last month projected that global goods trade would expand by just 0.9% this year, a modest improvement from April’s contraction forecast, but far below the 2.7% growth expected before Washington’s new wave of tariffs.

The trade-weighted average U.S. tariff rate has skyrocketed from 2.4% at the start of the year to 18.4% today, reshaping supply chains and threatening to erode confidence in the rules-based global trading system.

While Washington argues tariffs will secure domestic industries and deliver trillions in revenue, they have rattled global markets, prompting fears of a lasting hit to world trade volumes and investment flows.

As confidence in Treasuries wavers, investors are turning to gold. Prices have surged 35% to more than $3,500 per troy ounce, reflecting investors’ scramble for safety.

The rally is fueled by two forces: central banks diversifying away from the dollar, accelerating a trend that began after Russia’s 2022 invasion of Ukraine, and private investors hedging against inflation and fiscal risks.

The Fed Under Siege

At the heart of market unease lies U.S. monetary policy. Donald Trump’s escalating attacks on the Fed, including his attempt to dismiss Governor Lisa Cook, have amplified fears of political interference. Investors worry that a weakened Fed would be more inclined to cut rates, stoking inflation and further depressing Treasury prices.

Tariffs and the Bond Market

The U.S. bond market faces its own set of challenges. The Congressional Budget Office (CBO) estimates that Trump’s tariffs could bring in $4 trillion over the next decade, partially offsetting the revenue losses from his One Big Beautiful Bill Act, which is projected to increase federal borrowing by $4.1 trillion.

For bond investors, tariff revenues are a crucial buffer against an avalanche of Treasury issuance. Yet, this assumption was shaken when an appeals court upheld a ruling that Trump had overstepped his authority on certain levies. The ruling, though allowing tariffs to stay in place pending appeal, triggered a sharp sell-off in Treasuries as markets began pricing the risk of reduced revenues and higher deficits.

Debt Mountain Ahead

Even with tariff revenues, the U.S. debt trajectory is daunting. Without them, the CBO expects debt-to-GDP to exceed its Second World War peak by 2029. Long-term projections are bleaker still, with U.S. debt potentially reaching $150 trillion by 2055. Rating agencies have already signaled that tariff revenues factored into their decisions not to downgrade U.S. credit further.

Fragile Global Stability

Taken together, these pressures highlight the fragility of the global financial system. Protectionist trade policies are curbing growth, fiscal deficits are climbing, and central bank independence is under threat. Traditional safe havens such as the dollar and Treasuries no longer inspire the same trust. In their place, gold has re-emerged as the world’s crisis asset.

For now, investors, policymakers, and households alike must navigate a world economy where risks are multiplying at a high speed.

With trade slowing, debt climbing, and the Fed under siege, turbulence in the U.S. bond market could spill far beyond America's borders.