Prime Minister Christopher Luxon hopes to form new trading bloc with the European Union, as US bond market meltdown forces Donald Trump to suspend some tariffs for 90 days

A meltdown in the United States bond market overnight has created a window of opportunity for world leaders to salvage the global trading system from a rampaging Donald Trump.

The American President suspended the so-called reciprocal tariffs—while keeping the 10% baseline and hiking the China rate to 125%—in an attempt to halt a sharp selloff in US bonds overnight. 

Yields on 10 year government bonds initially fell to 3.8%, when Trump announced the policy last Thursday, but climbed more than 70 basis points to 4.5% when those tariffs took effect on Wednesday — even as the stock market crash continued. 

Investors were abandoning American assets of all kinds: share prices were falling, bond yields were surging, and the US dollar was losing strength. Analysts told Reuters it was similar to the “dash-for-cash” in March 2020, which required intervention from the US Federal Reserve.

The dramatic move in the bond market was partly due to a specific leveraged trade going wrong. But it was triggered by the volatile reaction to Trump's tariff policy and the possibility that it would lead to inflation and slow economic growth simultaneously.

Sensing a risk the stressed bond market could trigger a financial crisis, Trump was convinced to soften some aspects of his trade policies. He paused the ‘reciprocal’ tariffs for 90-days to soothe the panic and allow for new trade deals to be negotiated.

“I caught that people were jumping a little bit, out of line. They were getting a little bit yippy, a little bit afraid,” he told reporters, when asked why he implemented the pause.

“Nothing is over yet, but we have a tremendous amount of spirit from other countries, including China. China wants to make a deal, they just don’t know quite how to go about it.”

Investors took Trump’s comments about “having to have flexibility” to mean he may drop his most harmful trade policies. US bond yields stabilised and key stock indices surged as much as 9%.

Salvage mission

Back in New Zealand, Prime Minister Christopher Luxon welcomed the pause but criticised the US White House for its unpredictable policy making. 

“What we really need is real certainty and part of the problem is the instability and uncertainty. We’ve woken up this morning and there’s been a suspension of reciprocal tariffs, above the 10% level, for many countries, for 90 days,” he told reporters. 

“The danger is that everybody's just sitting there, in a state of stasis, actually, not wanting to invest. Consumers not wanting to purchase or buy, because they don’t know what’s happening next”.

Luxon said he had lined up calls with a series of world leaders to discuss forming a trading bloc with countries that wanted to retain the free market system. 

This could include members of the CPTPP, a 12-nation trade agreement, and the European Union working together to “champion rules-based trade” and remove some trade barriers. 

A trading bloc made up of the CPTPP countries and the European Union would cover almost a third of global trade, collectively rivaling the size of the United States. 

“There's a real opportunity for us to coordinate and to work together, and I'll be having some of those conversations today,” Luxon said.

Luxon said it was still possible to salvage the rules-based trading system, despite some declaring Trump’s second presidency as the end of the free market era. 

“For my part, I’m not ready to throw in the towel quite yet. Kiwis have worked too hard and for too long, to give up on the values and institutions which have seen our country and the region we live in thrive,” he said in a speech to business leaders. 

“Free trade works. It lifts incomes. It creates jobs. It builds partnerships. And it secures peace. I think that’s worth fighting for — and I’m up for that fight."