It is a relationship between President Donald Trump and the United States bond market which is on its uneasy footing and has become quieter, but few experienced investors think that the tension has actually vanished. The U.S. government debt market with a value of 30 trillion, referred to as the backbone of the world finance, is a long-term memory. Given the experience of the so-called Liberation Day tariffs of Trump earlier this year, regulators in Washington have realized that even a whiff of miscalculation will cause the investors that fund the federal government to react quickly and at a high cost.

Bond traders did not react normally when the tariffs were announced first in April. The yields went up, the prices dropped and the message was clear, trade policies and deficits were to be challenged. The administration has since changed to a more cautious tone. The announcements of policies have been cautious, fiscal messages limited and messages by the government have emerged to soothe and not to stimulate. At face value, the bond market has soothed down. As well, under it, there is a standoff.

This weakness was revealed once again during the early November. The same day that the U.S Treasury indicated it may auction more long-term government debt, the Supreme Court commenced hearing the constitutionality of the wide-ranging tariff regime instituted by Trump. The two developments alone would have disturbed markets. The two reawakened ancient fears. Its benchmark 10-year Treasury yield was up over six basis points, one of its biggest daily fluctuations in months, even though it had been moving down throughout much of the year.

The issue was not technical to bond investors. The issuance of long-dated debt increases the likelihood of an increase in the cost of borrowing by the government in future especially when already deficits are historically high. Simultaneously, the legal dispute complicated the question of tariff income, which the administration has been using multiple times as a means to offset expenditures and even out the fiscal perspective. The mixture once again raised doubts on how Washington intends to cope with its commitments without further stressing on its debts market.

The episode was like a reality check as one analyst wrote the next day. The term reverberated through the trading desks not due to its dramatic nature but because it distilled something that many in the market were already feeling. The tranquility of the past few months was relative as it had been based on the assumption that the administration knew its own boundaries of investor tolerance.

The relationship is still strained according to the discussion in closed doors by asset managers and bank executives. A series of interviews with the senior figures that manage trillions of dollars of capital indicate that there is a consensus that the bond market is closely monitoring every action of Washington with strange vigilance. It is not really about an individual policy choice but an overall trend regarding the management of U.S. finances under Trump.

The debt load of America has been increasing regardless of efforts to mitigate it during the last decade, pandemic expenditure, and the structural deficit have enabled it to increase at a faster pace. Although investors traditionally demonstrated almost insatiable demand of Treasuries, this belief is based on the premises of political stability, predictability of policy decision-making, and reliable approaches to addressing long-term liabilities. The presidency of Trump with his sudden changes in the policies and hostile speech has proven those assumptions over and over again.

The Liberation Day incident was especially educative in the eyes of an investor. It showed that the trade policy, which is often regarded as independent of fiscal policy, may have direct effects on government borrowing rates. Tariffs can create revenue but they can also lead to slack growth, interruption of supply chains and fueling of geopolitical tension. These second-order effects are just as important to bondholders as the headline numbers.

The response of the administration since April indicates that it learnt that lesson. Officials of the treasury have been keen to indicate stability and cautiousness. Comments in public are focusing on stability in the market and the introduction of policies has been gradual to avoid shocks. But even such minor clues as the November talk about issuing longer term debts, suffice to put the nerves on edge.

Credibility is also an issue. Investors do not just look at budgets and forecasts, but they evaluate intent. It is still unclear to many of them whether fiscal restraint is a real priority or a temporary measure. The size of the deficit coupled with ambitious policy objectives does not allow much room to compromise. Any sense that the political factor is being given a higher priority than fiscal discipline will soon trigger the volatility again.

The only difference is that the bond market is at the same time a financier as well as a disciplinarian, which is what makes this moment very delicate. On the one hand, it allows the government to subsidize itself at a fair cheap rate. Conversely, it brings punishment in case of loss of confidence. The increase in yield has a direct effect on the increase in interest costs, which crowds out other expenditures and reduces policy alternatives. Markets know this feedback loop and politicians occasionally fail to recognize it.

It has also got an international aspect. The U.S. Treasuries are not just a local tool, they form a foundation of portfolios, currencies, and other financial systems everywhere. Any long term instability would spill over into American borders. That fact allows understanding the reason why investors are responsive to indications of fiscal insecurity. Stakes are not ideal and the amounts at stake do not provide much room to rest.

At a distance, the existing placidity may appear to be reassuring. Yields are loosening, volatility has calmed down and headlines have been relocated. Among the nearest to the market confidence is, however, conditional. The accepted opinion is that the way to maintain peace is through prudence and not by action. The only disagreements that have not been resolved are regarding deficits, debt, and the purpose of tariffs.

In that regard, the association that the bond market has with the Trump administration can be compared to a ceasefire, not to a reconciliation. The two parties know the price of escalation. Investors understand that too much pressure will upset the markets which they rely on and policymakers understand that it is not a very good idea to argue with bond vigilantes. But the restraint between man and man purges not the tensions.