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Carney’s Checkmate: How Canada's Quiet Bond Play Forced Trump to Drop Tariffs
(deanblundell.substack.com)
this post was submitted on 11 Apr 2025
232 points (93.0% liked)
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I don't understand how prices drop and interest rates rise as a consequence of nations selling bonds. Wouldn't prices only matter to the buyers and sellers of the bonds? And why would interest rates change?
In any case, if it gets the world to trust the USA much less, as we sadly very much deserve, I'm all for that.
Bonds offer fixed interest.
Let's say a $50 bond offers $5 dollar yield at maturity (10%).
If those that currently own bonds sell en masse, the bond becomes less valuable (let's say $40) but the yield is still $5.
Now the interest rate is 5/40 = 12.5%.
The 30 year treasury bond interest rate is closely tied to mortgage rates.
A higher bond interest rate makes it more expensive for businesses to borrow money.
If other countries sell off US bonds (which are purchased in US dollars), they flood the market with US dollars which ultimately diminishes the dollars value.
Trump and his ilk like to act like the US subsidizes many of its allies when that is very clearly an oversimplification. Many of the US's allies own US debt (in the form of bonds) because the US is an extremely reliable borrower. If those countries decided the US is not reliable enough to lend money to anymore, it would be extremely problematic for the American economy.
Tl; Dr: Canada, Japan and the EU could twist American home buyers and businesses by the balls by selling off bonds and, if they took it far enough, even devalue the US dollar. America spends a shit ton of borrowed money from its allies and even China.
I still don't understand why interest changes if it's a fixed interest rate. I get that a bond could be sold for a lower price than initial purchase price, but does the interest rate only apply to the most recent sale price of the bond?
The interest rate isn't fixed, the bond yield (in dollars) is fixed.
Its presented as a percentage interest rate which can be variable.
For example let's say you have a $1000 bond that pays a $50 dollar yield at maturity. The rate would be 5% (50/1000).
If the market is flooded with bonds, their value would decrease due to increased supply. Now that bond may only be worth $900 but still pays a fixed yield of $50. The interest you get paid in this scenario is now 900/50 = 5.5%
This is great if you are a lender. When you buy bonds you are essentially lending money the government and now your yield will be higher.
But many ordinary people are more often in the position of borrower. The interest rate for mortgages, car loans etc. are based off of bond rates. So if that rates goes up, many major purchases become more expensive over time. Small businesses are also heavily impacted by increased borrowing costs.
Generally, higher bond rates represent decreased confidence in a government entity's fiscal responsibility. When US federal bonds are sold off collectively, the rate goes up, signalling that investors have lost faith in the US government reliably paying back its debts.
I read that as Dr Canada at first