Trump’s chaotic economic moves may seem political, but they could trigger a financial disaster with real consequences for Canada
Major financial players are beginning to realize that U.S. President Donald Trump lacks a coherent economic plan and his policies seem to destabilize everything they touch. The greatest fear is that Trump could accidentally crash the bond market, with catastrophic consequences globally, including in Canada.
Trump appears intent on shaking up the status quo. His illegal and unpredictable tariffs are creating chaos in global markets, while his “Big Beautiful Bill,” making its way through Congress, has heightened concerns among investors. Tax cuts for the wealthy may appeal to markets, but they also affect U.S. Treasuries, the world’s most conservative and supposedly safest investments. These bonds serve as a benchmark for global interest rates, including those in Canada, meaning instability in the U.S. Treasury market could have ripple effects worldwide.
Treasury markets thrive on stability. Traditionally, investors purchase government bonds as long-term, income-generating assets. But as J.P. Morgan Chase CEO Jamie Dimon points out, “Bond dealers … inventories are much smaller than they used to be, partly because of rules and regulations … and you are going to see a crack in the bond market.”
Dimon explains the sheer scale of financial movements: “J.P. Morgan alone buys and sells $3 trillion a day. And we move $10 trillion a day of money, and we’re probably a 10th. So the money moving around the world is probably $100 trillion a day.” If this financial flow is disrupted, losses mount and a crisis ensues.
The risk isn’t hypothetical. On April 2, markets reacted sharply to Trump’s tariffs, which proved more chaotic and far-reaching than expected. Bond investors fled, sending U.S. Treasury yields soaring. The 30-year bond yield spiked at its fastest rate since the high-interest era under Federal Reserve chairman Paul Volcker in the early 1980s, when the Fed aggressively raised rates to combat inflation. While many assume the Federal Reserve controls interest rates, Dimon warns that bond yields play a key role as well.
A sharp rise in yields could set off a chain reaction—higher interest rates, tightened liquidity and financial instability. For Canadians, this could mean increased borrowing costs, affecting everything from mortgages to business loans.
The $28-trillion U.S. Treasury market depends on liquidity. Investors mitigate risk with credit default swaps, financial instruments meant to insure against disruptions. However, as the 2008 financial crisis exposed, these instruments are poorly regulated and incapable of preventing systemic collapse.
Trump’s “Big Beautiful Bill” threatens to unravel a delicate economic balance, cutting Medicaid and other social programs to offset $4.5 trillion in tax breaks. Rising U.S. debt could weaken investor confidence, prompting mass sell-offs in U.S. Treasuries. If interest rates climb sharply as a result, it could destabilize the repo market, the short-term lending system that banks and financial institutions rely on, driving up margin rates, squeezing liquidity and ultimately triggering a massive failure in the credit default swap system.
A negative swap spread could spark margin calls, leading to cascading market failures. Contagion would spread rapidly, and as seen in 2008, hedge funds, banks and major financial institutions could crumble. If such a crisis unfolds, Canada’s financial sector would also be affected, as higher global interest rates could tighten credit conditions and slow economic growth.
As Dimon warns, “When you look at economic history, when those tectonic plates shift, it’s very hard to see it in real time … I just don’t know if it’s going to trigger a crisis in six months or six years.”
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.
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