Good morning. Our attention today is on U.S. President Donald Trump’s speech at the World Economic Forum in Davos – and why the market for U.S. debt might be the ultimate arbiter of Trump’s next steps.
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In the news
Trade: In his Davos speech, Prime Minister Mark Carney stands behind Greenland and urges countries to condemn economic coercion.
Tech: Vancouver social media company Hootsuite is seeking to work with ICE to “build trust.”
Media: Shareholders oppose Blue Ant’s offer for TV producer Thunderbird Entertainment.
Trump takes questions from media yesterday at the White House.Kevin Dietsch/Getty Images
In focus
Waiting for U.S. bond markets to get ‘yippy’
Trump’s address today in Davos promises to keep the world awash in alarming headlines over Greenland, tariffs on Europe, the rise of China and, hold on a second: Do I need to worry about Canada being invaded now?
The challenge, as always, rests in distinguishing between news and noise. In other words: Is Trump serious, or was yesterday the most epic TACO Tuesday of all time?
One way to tell where the White House might move is by watching the US$30-trillion market for U.S. bonds, which are loans made to investors by the federal government to finance things such as military spending, social services and government operations.
When investors are worried about the long-term outlook for the U.S. economy, the prices of U.S. bonds fall. (See also: Japan yesterday.)
The higher return investors then receive on a fixed interest payment – that’s the yield – raises the cost of government spending programs, and borrowing prices for consumers. (If a bank can make a relatively risk-free loan to the U.S., it needs more incentive to lend to individuals, who are more prone to default.)
I spoke with Karl Schamotta, chief market strategist at financial services giant Corpay Inc. – an S&P 500 global corporate payments company – about why that dynamic may yet constrain Trump’s escalating threats.
There are a lot of alarming headlines right now. In trying to understand what’s real in all this, can we learn from the bond markets?
Yes, I think that’s right. Bond markets are one of the clearest places to look if you want to understand how investors are reacting to the direction of economic policy, rather than to any one headline.
Equity markets move on sentiment and earnings. Bond markets tend to move when confidence in the broader framework starts to change – things such as inflation stability, fiscal discipline and institutional credibility over time.
When investors lend money for five or 10 years, they’re not reacting to a speech. They’re asking whether the rules are going to hold over the life of that investment.
What exactly are investors worried about when they start demanding higher interest rates to lend to governments?
At a high level, it comes down to uncertainty. Investors demand higher returns when they think inflation may be more volatile, when growth shocks become more likely or when economic policy becomes harder to predict. You don’t need a crisis for that to happen. You just need doubt.
In this case, investors are looking for greater insurance against what they see as more erratic policy making – not just in the U.S., but across major economies.
You’ve pointed out that U.S. bond yields have been rising while the U.S. dollar has weakened. Why does that matter?
Under normal conditions, higher U.S. yields attract capital from abroad. Investors move money into U.S. assets, and that drives the dollar higher. It’s a very mechanical relationship. What’s unusual right now is that yields are rising, but the dollar is falling. That’s not how a safe haven usually behaves.
That combination is more characteristic of an economy for which investors are demanding higher compensation to lend, while they are also reducing exposure. It suggests concerns about credibility over just returns.
How unusual is that behaviour, historically?
It’s quite unusual, especially during periods of global stress. If you look back at the global financial crisis or the early stages of the COVID-19 pandemic, investors rushed into U.S. Treasuries and the dollar, even though the shocks originated in the United States. The dollar strengthened because the U.S. was still seen as the safest place to park capital.
What we’re seeing now is different. Investors appear to be rebalancing away from the U.S. at a time of heightened geopolitical tension. Markets are still functioning, and these moves aren’t extreme by historical standards, but the behaviour itself stands out.
Does President Trump pay attention to this? Does the bond market actually constrain him?
At the extremes, yes. Last year, after “Liberation Day,” Trump explicitly acknowledged that bond markets were acting “yippy.” Within days, there was a compromise with China that delayed U.S. tariffs. That wasn’t a coincidence.
He doesn’t seem to understand bond market mechanics on a day-to-day basis, but when borrowing costs rise sharply, he notices. Bond markets raise the cost of policy, and that can force tactical adjustments. That said, we’re not at that point yet.
Why not? Given everything we’ve discussed, why haven’t borrowing costs moved further?
Because many investors still assume this follows a familiar pattern. There’s a belief that escalation eventually gives way to negotiation – that Trump goes to Davos, meets with European leaders and comes out with a deal he can present as a win. That assumption is keeping a lid on yields for now.
You can see it in market volatility and in the fact that yields haven’t risen more sharply, given the scale of the rhetoric.
What happens if that assumption turns out to be wrong?
If threats harden into sustained policy shifts, or if pressure on institutions like the Federal Reserve continues, investors will demand more compensation to lend. That means higher borrowing costs for the government, for businesses and for households. Over time, that narrows the room to manoeuvre. Bond markets don’t dictate policy, but they do impose discipline when uncertainty gets expensive.
What should we be paying attention to now?
Watch the relationship between long-term yields and the dollar. If borrowing costs keep rising and the dollar continues to weaken, that tells you investors are becoming more uncomfortable with the direction of travel. If yields stabilize and the dollar firms, it suggests confidence is holding.
Right now, markets are still testing how much uncertainty they’re willing to tolerate. That test isn’t finished.
This interview has been edited and condensed.
Charted
A win’s a win
Homicides fell by about half last year in Toronto and Winnipeg, police data show, part of a remarkable downturn in lethal violence across Canada that experts say politicians must consider as they push stiffer sentences for violent offenders.
Quoted
You cannot ‘live within the lie’ of mutual benefit through integration when integration becomes the source of your subordination.
— Prime Minister Mark Carney
Read the full transcript of Carney’s speech yesterday at the World Economic Forum.
Up next
More files we’re following
In court: The Lisa Cook case goes before the U.S. Supreme Court today, in a crucial test for the Fed’s independence.
On mute: Banks are likely hoping Trump forgot he called on them to cap credit card interest rates at 10 per cent. Yesterday was the deadline, but no enforcement plans were shared.
Going up: Gold is still on a tear as investors seek safe places to park their money. Can someone explain to me how gold is supposed to help me in a Last of Us situation? I can’t eat gold!
Email me: cws@globeandmail.com
Morning update
Global markets eased as U.S. threats to acquire Greenland kept investors on edge ahead of President Donald Trump’s speech in Davos.
Wall Street futures pointed higher suggesting modest gains at the open, while TSX futures were also in positive territory, buoyed by gold prices.
Overseas, the pan-European STOXX 600 was down 0.43 per cent in morning trading. Britain’s FTSE 100 slipped 0.13 per cent, Germany’s DAX fell 0.71 per cent and France’s CAC 40 gave back 0.12 per cent.
In Asia, Japan’s Nikkei closed 0.41 per cent lower, while Hong Kong’s Hang Seng gained 0.37 per cent.
The Canadian dollar traded at 72.31 U.S. cents.