Flight to Safety, but on Another Airline

Trump's tariffs are here, and they've shaken up markets in ways that might surprise you. As the world adjusts to this new reality of reciprocal tariffs, we're seeing some fascinating shifts in investor behavior, especially when it comes to the traditional "flight to safety" that usually benefits US Treasuries. But before we get into that, let's understand what's happening in the bigger picture of global trade.

On April 2nd (what Trump called "Liberation Day"), the White House unveiled sweeping tariffs affecting nearly every country. Initially, they announced 20% tariffs on products from most nations, with Trump aiming to address what he sees as a massive $1.2 trillion goods trade deficit. Then on April 3rd, we saw a 25% tariff on auto imports, and subsequently, more targeted tariffs have been rolled out - China getting hit with a whopping 125% tariff (up from the initial 34%), Vietnam with 46%, and even tiny Sri Lanka with 44%.

After markets reacted violently, Trump paused some of these tariffs for 90 days for most countries (except China) and reduced the baseline to 10% - but the damage to market confidence was already done. What we're seeing now is the economic fallout, and it's affecting everything from stocks to bonds in ways that challenge conventional wisdom.

America's Share in Global Trade: Not What You'd Expect

Let's talk about an interesting data point that most people don't realize:

Contrary to the popular narrative, America has actually inched upwards in terms of share in total global merchandise exports. While China has indeed taken the crown, the US has done a remarkable job keeping up. This challenges the notion that America is somehow "losing" in global trade - at least in terms of market share.

On the import side, the story is similarly surprising:

The American economy has managed to stay consistently at around 13.1% of global imports without letting that percentage increase significantly. This shows remarkable stability in America's position as a global consumer.

So if America's export share isn't collapsing and import share isn't exploding, what's driving Trump's tariff obsession?

Why Trump’s Tariffs Are Really a mix of Debt and Deficit

Let’s cut through the noise. The charts tell the real story.

America’s goods trade deficit has ballooned to around $1.2 trillion annually. But here’s the kicker:

> “We’re not just buying stuff—we’re printing IOUs. And the folks holding those IOUs are changing.”

For decades, there was an unspoken deal:

Countries like China and Japan export goods to the US
They recycle surplus dollars into US Treasuries
America gets cheap financing for its deficits

But look at this:

Over the last decade, the US debt ownership has been on the decline. Major trading partners with whom the US has a deficit have also reduced their holdings of US debt.

As one Fed official privately noted: “We’re not just taxing imports—we’re taxing the global financial system’s exit from dollar dominance.”

The deficits keep growing, and the ownership of US securities is increasingly less concentrated among the countries with which the US has these growing trade deficits. This shift has profound implications for the global financial order.

Why isn’t China panicking?

One chart tells you everything you need to know about why China isn't panicking over Trump's tariff tantrums:

Look at that change! The U.S. had been China's largest export market for years, commanding over 17% of China's total exports. But since the first round of Trump tariffs in 2018, that share has been steadily declining - falling to 16.7% after the initial tariffs, and by 2024, dropping to just 14.7% of Chinese exports.

This represents the lowest level in a decade.

The Shocking Response in the Bond Markets

Now here's where things get really interesting. When global trade tensions rise, investors typically flee to the safety of US Treasuries. It's been the playbook for decades - market turmoil means buy US government debt. But something unusual happened this time:

Look at what happened to US Treasury yields after Trump's tariff announcements in early April. Something remarkable is happening that defies decades of market orthodoxy, when you compare the 1-month changes across countries. The interest rate - or yield - for US government bonds over 10 years spiked sharply! This is exactly the opposite of what traditionally happens during market upheaval.

Look at that monster move in US yields! The 10-year Treasury yield spiked from 3.87% to nearly 4.5% - a 60+ basis point surge in days. The 30-year yield broke above 4.9%. This is precisely when tariff fears should have driven a "flight to safety" into Treasuries, pushing yields lower, not higher.

Now compare with Germany:

German yields have actually compressed over the last month. The 1M ago line (dotted green) sits above the latest curve (solid blue) across most maturities. While US yields surged, German 10-year yields dropped about 12 basis points to 2.18%.

And Japan shows a similar pattern:

Japanese short-term yields have compressed notably from a month ago, with the 2-year JGB yield falling despite global uncertainty. The 10-year JGB yields compressed by about -8bps to 1.5%.

Meanwhile, Indian yields have remained remarkably stable, with the 10-year actually falling to 6.34% - the lowest in over three years.

Flight to Safety, But on Another Airline

Let's be blunt: We're witnessing what might be the most consequential shift in global finance since Bretton Woods. Investors are fleeing for safety, but they're not buying their usual first-class tickets on Air Treasury.

When markets panic, the textbook says everyone rushes to US government bonds. It's Financial Markets 101. But this time, the money is flying to Frankfurt, Tokyo, and even Mumbai instead.

Why? Three reasons:

Currency risk premium: With America's trade deficits at record highs and Treasury issuance exploding, the dollar's role as the risk-free global currency is being questioned. International investors are demanding an extra 70-80 bps yield to compensate for potential dollar weakness.
Supply-demand imbalance: Trump's tariffs hit just as Treasury auctions were ramping up to fund the $1.8 trillion annual deficit. When nobody showed up to buy at the 3-year auction, the market seized up.
Geopolitical rebalancing: Foreign holders (especially China) are quietly diversifying reserves away from Treasuries. They're not dumping them outright - that would crash their existing holdings - but they're not buying new issuance either.

The numbers tell the story: While the US 10-year yield spiked 60 bps, German yields fell 12 bps, Japanese yields compressed 8 bps, and Indian yields eased 5 bps. This isn't random - it's a structural reallocation.

Think about what this means: When the world gets scary, investors no longer automatically reach for Treasuries. They're booking tickets on Lufthansa and JAL instead.

The Fed can't single-handedly save this situation (the Fed Put). If they cut rates to ease Treasury market stress, they risk further dollar weakness and inflation. If they hold firm, the Treasury's borrowing costs explode just as $9.2 trillion needs refinancing this year.

And remember - America doesn't control the long end of its own yield curve. The market does. The 30-year yield crossing 4.9% is the market saying, "We don't believe you'll pay this back without inflating the currency." Investors are concerned about the impact of tariffs on the US economy. Higher tariffs could lead to higher inflation (as imported goods become more expensive) while simultaneously slowing economic growth - the dreaded stagflation scenario. When inflation risks rise, bond yields typically go up as investors demand higher returns to offset the erosion of their purchasing power.

The sell-off in US Treasuries reflects growing concerns about America's fiscal position and, crucially, about the long-term role of the US dollar as the world's reserve currency. If Trump's policies accelerate the move away from dollar hegemony, the consequences could be profound.

To put this into perspective: The US government now spends 16% of federal outlays just servicing existing debt - more than the entire defense budget. That percentage rises with every basis point increase in yields. For investors, this regime change means rethinking the entire concept of "risk-free" in your portfolio. US Treasury volatility is now higher than many equity indices - which turns modern portfolio theory on its head.

India's Position in This Trade War

Where does India stand in all this? First, let's look at the current state of Indian exports to the US:

Surprise, surprise! India's top exports to the US is actually electronics, contrary to the popular notion that it's pharmaceuticals and jewelry.

There is probably no need for India to retaliate - at some level, we are irrelevant in the overall scheme of things, and when Americans start to feel the pinch of these tariffs the impact will be large enough for Trump to reconsider and accept just about anything in exchange for a step down. It's a game of poker, and America no longer holds many of the "trump" cards.

What's The End Game Here?

The world order is changing, but it's been changing for a while. Trump is just making it official.
A no-tariff world would still be very inconvenient for America, so that isn't even an end-goal. At best, deals will be made to show off that America can still dominate in trade talks.
The official shift away from easy exports to the US means a massive shift to other centers of consumption. There are very few: Europe, China, and India are the biggest.
China will remain protectionist, and Europe has both trade and non-trade barriers. So India will also have to keep tariff hats on to prevent its industries from being overwhelmed with cheap imports.
The biggest change will be an increased focus, by every nation, on more domestic manufacturing for their own consumption, especially in defense and critical areas.

The tectonic plates of global trade are shifting in real-time. As Deepak noted in his previous analysis, the key isn’t predicting the endpoint—it’s building portfolios resilient to multiple futures. The numbers show India emerging as a strategic hedge, not through government action but via organic market realignment. In this environment, flexibility trumps conviction.