The U.S. Dollar and 10 Year Treasury

You might have noticed that pretty much everyone, everywhere is freaking out about everything related to the economy. Recession fears. Egg prices. Tariffs are on. Tariffs are off. Another burgeoning housing market collapse. Stock market volatility. Interest rates. Defaults. Leverage. Overnight settlement markets. Liquidity. Weak dollar. Crude oil collapse. Repo markets. Stagflation. Deflation. Inflation. Disinflation. You name it.

We’ve managed to confuse the global markets, crush long standing alliances, unwind trade deals we wrote and somehow even piss off Canada. But there’s one topic that surfaced over and over on the news last week that trumped even Trump.The bond market.

Just as we all became epidemiologists during the pandemic, everyone is now an expert in the markets, tariffs and trade. But last week armchair warriors got pretty quiet because the financial channels were all filled with news about the bond market and how the yield on the ten year treasury somehow foreshadowed the end of the American empire. Pundits everywhere misusing the phrase “full faith and credit,” talking about calamitous inversions, the flight to safety, negative correlations, and if the U.S. Dollar is at risk of losing the “privileged status” of the world’s reserve currency.

If you’re wondering what all the fuss is about, I got you. We’re going to break it all down, tell you what’s real, what’s hyperbole, if we’re headed for a collapse and why a bunch of nerds from the bond desks are having their moment in the sun.

The idea of the United States going bankrupt is science fiction to most of us. Sure, there are Chicken Little pundits that talk about the size of our debt and how it will eventually collapse the United States and bring the global economy to its knees. Well, the reason that hasn’t happened despite the fact that the national debt is now $36 trillion on a budget of $7 trillion is because we are a sovereign currency issuer.

As importantly, because our economy is so big and historically powerful relative to other countries, the value of that dollar we print has been relatively stable. In fact, if you’re of a similar mind to Donald Trump, the dollar is too damn strong. He’s been on that hobbyhorse forever, especially when it comes to China. More on Trump and his obsession later. Let’s talk about the strength of the dollar, how we profit from our debt obligations and what the hell this has to do with the bond market.

“The validity of the public debt…”

We are going to get into the economic and financial weeds shortly, but there is a political point that undergirds this entire discussion. A clause in Section Four of the Fourteenth Amendment states:

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

In other words, we will in every case—to any debt holder—honor our repayment obligations.

Most people are aware of the 14th Amendment because it passed on the heels of the Civil War and contains seminal principles like citizenship, equal protection, due process, the Insurrection Clause and the enforcement clause that gives the Congress power and authority of enforcement. But few people ever talk about the public debt clause.

So in addition to epidemiology and global trade, let’s add ‘constitutional scholar’ to our growing list of expertises, shall we?

In just a matter of weeks into this presidency Donald Trump has destroyed every single one of these provisions so why, oh why, would you think the U.S. making good on its debt obligations would be the one that remains sacrosanct?

The world sees us. It sees what we’re doing. They know we’re disappearing students and visa holders from the streets and sending them to foreign prisons designed for terrorists. They see Trump trying to sell Teslas on the White House lawn. They’re weirded out by the Gulf of America thing, threats to overthrow Greenland, yelling at world leaders we supported a minute ago and cozying up to Vladimir Putin, the most reviled man on the European continent. They see him dismantling government agencies. And they watched the tariff press conference too and said what the fuck?

So before we get into wonky economic discussions, understand that the rest of the world, which includes investors, sovereign wealth funds, multinational corporations, hedge funds and global trading desks, thinks we’re sliding into a dictatorship. Forget recession for a moment. A U.S. dictatorship is way worse in their minds because it means everything is subject to the whim of a madman, including the repayment of our debts. He has literally ripped up the rest of the 14th Amendment so why not that as well?

No one wants this.

But they look at us and say hmm, the guy who bankrupted the Trump Taj Mahal in 1991, Trump Plaza Hotel, Trump Castle and Trump Plaza Hotel and Casino in 1992, Trump Hotels and Casino Resorts in 2004 and Trump Entertainment Resorts in 2009 for nearly $7 billion dollars all told—along with folding Trump University after it was found to be fraudulent and Trump Steaks—admits to evading taxes, violated the Emoluments Clause, committed adultery, perjury and was convicted of a felony, doesn’t inspire investor confidence if you also know he’s willing to break every constitutional amendment (and no one can seem to stop him). You cannot take this man out of this equation because he’s trying to overthrow the government from within and declare himself a monarch. And we’re the only ones who can’t see it.

With that, let’s get wonky.

This first chart is a look at the yield on the ten year treasury, which I’ll explain in detail in a moment. You’ll notice that it hasn’t been this high since the runup to the financial crisis and the peak of the inflation crisis under Biden. But what I want you to notice is this tiny little uptick at the very end. Okay, hold that thought.

Now let’s look at the value of the U.S. Dollar. Almost always, these two figures are positively correlated, which means they move together. The only times they pull apart is under extreme circumstances such as the financial crisis and COVID. So when the dollar is strong and rising, the yield on the ten year treasury typically follows suit. Now look at the same small piece at the very end. Last week, when the bulk of the tariffs were theoretically still going to happen, these two trendlines separated.

That was it. That was the big panic. So if you’re sitting there right now going “uh, what’s the big deal?” you are certainly right to ask the question. To answer what the big deal is, or whether it even really is a big deal, we have to do a little housekeeping to understand why this spells disaster in the minds of economists.

I’m going to set the table with a little history then we’ll unpack some definitions.

What is money anyway?

Over the years, we’ve talked a lot about Bretton Woods, the conference in 1944 that established the new global monetary and economic order in anticipation of the end of World War Two. But we should go back further to incorporate the 14th Amendment to understand the importance of central banking and monetary stability as well because Bretton Woods will make more sense in that context.

In fact, we can go back even further to our founding when there was tension between the Federalists and anti-Federalists over whether we even needed a central bank at all. Proponents on the Federalist side believed that the only way we would have the strength to defend the nascent republic against future wars and also to pay off the debt from the revolution, was to issue currency and have the ability to take on debt. To facilitate this, there needed to be a central clearinghouse for all this activity.

Sure enough, this would be tested multiple times throughout our history even as early as the War of 1812. Then again with the Civil War, which gave rise to the 14th Amendment. If we were going to heal as a nation and once again pay our war debts, we would need to ensure to foreign and domestic investors alike that the U.S. word was its bond.

A treasury bond, to be more precise.

This wasn’t the end of the great test to the financial system. Multiple shocks throughout the second industrial revolution caused panics and depressions. But we still managed to pay our debts. The first World War brought us to the brink and it was creative financing from industrial tycoons and loans facilitated by none other than John Maynard Keynes—that’s how he first became famous—that kept both the United States and the United Kingdom solvent after the war. Then came the stock market crash and subsequent depression. A combination of deficit financing, debt restructuring and bond issuances kept the U.S. afloat during this period and allowed us to build a wartime economy that positioned us as the strongest financial nation in the world coming out of World War Two. That’s why Bretton Woods was such a pivotal moment and turning point in the world.

Because the finances of the rest of the world were decimated and gold stores were depleted among participating nations during the war, Keynes led a team of ambassadors, financiers and diplomats to establish a new world economic order with the U.S. dollar as the foundation. From that point forward, when the world needed to invest money in a rock solid investment with guaranteed returns, the U.S. Treasury note became the true gold standard. And that was part of the catch. Even though we retired the physical gold standard, meaning every country had to maintain a reserve of actual gold tied one-to-one to the amount of currency it had in circulation, the Bretton Woods system tied the value of the U.S. dollar to the value of gold. So no need to hold it one-to-one, but that’s how money would be priced. It allowed the United States to issue more debt through treasuries and currency in circulation than what it could hold in gold. And that’s what allowed leverage in the financial system to develop the industrial and trade economy across the world. Money was unleashed in dollar denominations but still tethered to a physical store of value.

The yield on a treasury bond is a measure of confidence in its own way. Short term treasuries are referred to as notes, by the way. Longer term treasuries, like the ten year are referred to as bonds. That’s just in case you hear them referred to differently. That’s usually what it means.

So if we think about the Treasury Bond as an investment, then the amount that it pays out makes more sense. If the payout on a ten year bond is really low, it means that the world expects the economy to be stable and that there are other places to put your money that can make you more, right? If a ten year treasury bond has a yield of 2% then it usually means the dollar is strong and places like the stock market are more profitable. Other countries still like the U.S. Treasury bonds because it means they can convert their money into U.S. dollars. U.S. consumers like low yields because important things like mortgage rates are tied to the ten year treasury as well. Thus, if the ten year is low, so are mortgage rates.

The only downside is that a strong dollar and low yields means that other currencies don’t buy as much as the dollar so it makes goods and services from the United States more expensive. And that’s what leads to trade deficits. And that’s what Trump is attempting to fix. But hang on. Let’s go back into history to explain why it will be nearly impossible to accomplish this through tariffs alone as a blunt object.

If Bretton Woods made the U.S. dollar the most valuable commodity on the planet and the baseline for all international trade settlements, it also opened up the dollar to speculative behavior. And that’s what happened in the 1960s. Because we were still tied to the value of gold and operated under a strict philosophy of balanced budgets—meaning no deficits—the dollar was overheating. The War in Vietnam and cost of the Great Society Programs were beginning to pressure the U.S. budget, which meant we had to issue more debt and more money.

Because the dollar still rested on the value of gold, President Nixon feared that speculators might undermine the dollar and foreign governments might demand gold in exchange for their debts, which would further undermine confidence in the dollar. So he took the surprising and unprecedented step of unilaterally declaring an end to the gold standard and allowed the U.S. dollar to “float.”

From that point forward, the dollar itself would be the value. And as we covered before, he also instituted price controls to tamp down on inflation and issued blanket 10% tariffs on all U.S. imports. Initially it worked and job growth and manufacturing surged on the news because Nixon was successful in devaluing the dollar. The Nixon Shock created havoc in foreign economies, the tariffs caused an inflationary spike within the U.S. and there was an oil crisis that added fuel to the fire when oil prices tripled on the first of two oil shocks in the ‘70s. To keep pace with inflation, the Federal Reserve tried to squash growth by raising interest rates and we entered a doom loop of stagflation.

For the record, the difference in the U.S. manufacturing base between 1971 and 2025 is night and day. While Nixon was successful in making U.S. goods cheaper and more attractive to foreign markets, Trump has a fraction of the manufacturing base to boost here. It simply doesn’t exist in the same way. In fact, our number one export is officially energy and the energy market is cratering right now, so the only thing he’s going to accomplish by implementing tariffs is raising prices on goods purchased inside the United States by the U.S. consumer. But I digress.

I give you this history again to illustrate one thing. There is no safety net when it comes to the dollar. The dollar is the value. The dollar is the economic foundation of the world. So now go back to our correlation problem that caused everyone to freak out last week.

An increase in the 10 year treasury yield means that investors are losing faith in the long-term economy. It also means that borrowing for homes and cars will be more expensive on top of the tariffs that are about to make everything else more expensive. It means they believe the equities market will decline and recessionary pressures will make it hard to find safe havens. This is why pundits call these periods a “flight to safety.” Investors want less risk and guaranteed returns until such time as the market cycle turns over and the stock market starts cranking again.

There are other factors but for our purposes today, conventional wisdom states that inflation expectations drive increased yields in U.S. Treasuries because investors need a higher return. What we’re seeing now is whiplash. Inflation is still on the rise, even though core inflation backed off slightly last month. We know that tariffs will push inflation higher. So the yield on the ten year treasury is being pushed higher to match inflation expectations. But this also typically means that the dollar strengthens in conjunction with these moves because you need dollars to buy these treasuries. This is why the U.S. is unique. But last week, that’s not what happened. Instead there was a selloff of the dollar as investors flooded foreign stock markets and currencies.

This is why you might have heard the term “bond vigilantes” thrown around recently as well. This is a term coined in the 1980s by an economist named Ed Yardeni to describe investors who sell bonds in bulk to send a message to the issuing government. Basically saying, “we hate what you’re doing. Now stop.” It makes more sense now why it wasn’t the stock market, our trade partners, retaliatory threats, the finance news channels or Elon Musk who spooked Trump and his team. It was the bond market. Because the bond market is the market that bets on the two foundations of the global economy. The dollar and faith that our debts will be paid.

Remember, there’s nothing after the dollar to hold this all together. No gold standard. No physical collateral of any kind. Just the promise of a nation to repay its debts issued in the form of treasuries. Backstopping the dollar is nothing more than our word and a promise tucked away in the 14th Amendment. The only stated promise of that amendment not yet broken by the one man who is trusted to uphold the integrity and intent of this promise. The very man who has broken every promise and every covenant in his personal life, his professional career and duties of the office he holds.

The takeaway here is that believe it or not the entire global economy is built upon those words. “The validity of the public debt of the United States…shall not be questioned.” The only provision in the 14th Amendment that has yet to be undermined and broken by this administration. What you saw last week was the investor class, at every level, questioning this very statement. Strip away the fancy language, the jargon, the tickers and pundits, the pomp and circumstance; the economy is built upon our word as bond, and that bond has been broken by one man and one man alone.

Here endeth the lesson.