Donald Trump this past week abruptly ditched his plan to invade Greenland — and the head-spinning about-face came thanks to the US bond market.
Yes, you read that right: It wasn’t diplomacy, and it wasn’t backroom deals among bigwigs inside some posh chalet here at the World Economic Forum.
Instead, it was the bond market that solved the Greenland crisis, IMHO and in the opinion of my Wall Street sources, persuading the president to settle for a “framework” that merely puts a few more US military bases on the ice-covered island.
I know what you’re thinking: I’ve jumped the shark on this one, so caught up in my fixation on finance that I can’t see the broader geopolitical forces that made it impossible for our president to send in the Navy SEALs to seize all that strategically positioned tundra.
True, Trump upset the world when he said he sees Greenland as a piece of the US and aimed to make it happen by any means necessary.
While the island is inhospitable and barely inhabited, it’s also a territory of Denmark, a country that is a NATO member.
That means we have a treaty — ratified by Congress — not to mess with it.
All of which just proves my point.
While The Donald was blowing smoke about sending in troops, he more seriously brandished his preferred weapon of coercion — massive tariffs — on Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland.
They would either hand him Greenland or face an additional 10% tariff rate on their goods, later ramping up to 25%.
Europe went nuts — but so did the US bond market, with yields spiking and prices falling.
Stocks sold off, too, but their declines can be traced to the more serious tanking of bonds, spurred by the prospect of inflation caused by tariffs.
Strong signal
When bond prices fall and interest rates rise, that’s a strong signal that bad things are coming for the economy.
Higher rates mean higher borrowing costs for consumers, who in turn cut back on consumption. It also means we need to pay more money to finance our massive budget deficit.
We’ve seen this movie before.
Remember those onerous “Liberation Day” tariffs?
The reason they never destroyed the economy as many predicted can be traced to a massive sell-off in bonds.
Recall that the minute Liberation Day was announced, Treasury Secretary Scott Bessent faced all of the above.
The yield on the all-important 10-year Treasury bond skyrocketed, heading to 5% — a dangerous level that signals a steep recession even with Trump’s big plans for tax cuts and deregulation.
Traders, so-called bond vigilantes, kept selling until Bessent announced the whole exercise of “liberation” was on hold.
In fact, bond prices didn’t stop tumbling until Bessent began to cut trade deals with the world including our arch-nemesis China, taking tariffs to much lower levels.
The markets then resumed their upward trajectory, put in motion by the president’s deregulation and tax cutting.
We didn’t have quite the same scenario when Trump announced his Greenland tariff scheme, but it was starting to head in that direction. The 10-year note spiked to above 4.3% and stocks sold off, and hard.
Exit ramp
That is, until Trump on Wednesday announced here at Davos that he had a new deal, his Greenland “framework,” or exit ramp — where he appears to have gotten nothing really new since Denmark has been largely compliant about letting the US military set up shop on its turf.
Markets didn’t care — in fact, they celebrated.
Bonds recovered, as did stocks.
In other words, the vigilantes struck again.
Former President Bill Clinton famously summed up the power of the bond markets years ago, back in the early 1990s, when he was told by one of his economic advisers that he needed to raise taxes for deficit reduction or bonds would collapse and interest rates rise.
He was flirting with recession.
His exact words to Robert Rubin, as reported by journalist Bob Woodward (which I later confirmed with Rubin, then the National Economic Council chief) went like this: “You mean to tell me that the success of my program and my re-election hinges on the Federal Reserve and a bunch of f–king bond traders?”
Rubin said yeah.
Now, those f–king traders are even more important to Trump and Bessent.
The debt and deficits of the Clinton years were minuscule compared to what we have now: Annual budget shortfalls of close to $2 trillion.
Our debt is at $38 trillion, a whopping 125% of economic output.
And that is how a bunch of “f–king bond traders” — not a huddle of power players in Davos — solved the Greenland crisis.
