Bond market in a panic, U.S. stocks turning from fall to pump, basis trading collapsed: How did Trump use tariffs as a chip to play this game well?

Recently, the global financial markets experienced severe turbulence, with U.S. Treasury yields soaring and the stock market plunging, creating a rather rare record of stock-bond divergence. Subsequently, upon hearing news that Trump might suspend tariffs, the U.S. stock market quickly rebounded, indicating the market's extreme sensitivity to policy news. The underlying reasons include the collapse of high-leverage basis trading and the combined effect of Trump's strategic operations.

US bonds and stock markets are at risk of decoupling: How does high-leverage arbitrage in basis trading affect the market?

The financial media Kobeissi Letter pointed out that the yield on the US 10-year Treasury bond surged by 60 basis points in just three days, while the S&P 500 index plummeted by 8%, marking the largest weekly drop since 1982. Last night, the US stock market opening further revealed the decoupling crisis between US stocks and US bonds, which is believed to be caused by the rapid collapse of "basis trading."

The so-called "basis trade (" is a common arbitrage strategy used by hedge funds, profiting from the slight price differences between government bond spot and futures, and leveraging high leverage to amplify returns. Currently, the scale of this trading model has reached $800 billion, with leverage up to 100 times, accounting for 40% of the total trading volume of major brokerages.

However, with the rapid rise in bond market yields and the collapse of futures, the basis trading that originally worked in a low volatility environment has shown large-scale liquidation risks under severe market fluctuations, highlighting its fragility.

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This crisis was triggered by a surge in market volatility. Normally, in the face of recession expectations, the bond market should strengthen and yields should decline, but in reality, they have risen significantly:

This is due to the forced liquidation of long positions in basis trading. When the large leveraged positions are unwound, the pressure will be transferred to the brokers, who, due to capital constraints, are unable to bear it, resulting in further severe market fluctuations.

Trump personally calls the shots: Tariff news intensifies market volatility

However, with a post from US President Trump last night stating, "This is a great time to buy!" along with the spread of news about the "tariff suspension," investor sentiment reversed, with the S&P 500 and Nasdaq rebounding significantly, soaring 9.5% and 12.2% respectively in one day, the latter marking the second largest single-day gain in history, indicating the market's high dependence on policy direction and Trump's rhetoric.

BREAKING: President Trump’s financial advice: pic.twitter.com/nB0vhzwJZ9

— The Kobeissi Letter )@KobeissiLetter) April 9, 2025

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U.S. stocks experience a V-shaped rebound, and gold continues to rise: market sentiment remains hidden with unease.

As U.S. Treasury yields fall below 4.6%, short-term pressure seems to be alleviated. However, the Kobeissi Letter still reminds that due to the steady rise in gold prices, it reflects that risk aversion sentiment has not subsided:

Even though the stock market shows signs of a return to risk appetite, the trend of gold prices reveals the market's uncertainty about the future, remaining cautious and fearful.

Control policies and investor sentiment? The market influence behind Trump's strategy

It is not hard to see that Trump used tariffs as leverage, putting pressure on China while also influencing the overall market rhythm. Starting in March, he raised tariffs on China from 10% all the way to 104%, triggering retaliation from China and a panic sell-off in the market. The subsequent news of a "tariff pause" sparked a strong rebound, and the report warned:

This "talking→turbulence→clarification" strategy has turned the market into a testing ground for policy expectations, but the oversupply of U.S. Treasury bonds and the risks of basis trading still pose structural challenges.

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Short-term can save the fire, long-term has hidden worries.

Even if Trump successfully manipulates market sentiment through policies and rhetoric, boosting the rebound of the US stock market and strengthening US bonds, the underlying leverage risks and national debt pressures remain unresolved. In the future, investors still need to pay attention to the direction of US fiscal policy, whether basis trading will further collapse, and the market stabilization measures that the Federal Reserve (Fed) may take.

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This article discusses the shocking bond market, the fluctuations in the US stock market, and the collapse of basis trading: How did Trump use tariffs as leverage to play this game? Originally appeared in Chain News ABMedia.