Only weeks ago, market analysts debated whether the U.S. economy would accelerate under Trump’s tax-slashing, protectionist agenda. Now, suddenly, the dreaded R-word (recession, not ‘Republican reality check’) is being whispered across Wall Street. The shift has been stark: bond traders are rushing into short-term U.S. Treasuries, pushing the two-year yield into a steep decline since mid-February, reflecting expectations that the Federal Reserve will be forced to cut rates as early as June to counteract the economic slowdown.

It wasn’t long ago that people were asking whether the U.S. economy was about to speed up again—now, all of a sudden, recession is back in the conversation. “The market has gone from growth euphoria to full-scale panic.

This abrupt pivot underscores the growing cracks in Trump’s economic strategy. Initially, investors had cheered his return, believing his policies would supercharge the U.S. economy while the rest of the world struggled. Treasury yields surged late last year as markets priced higher growth and inflation—hallmarks of the so-called ‘Trump trade.’ But those expectations have unravelled since mid-February as the administration’s policies inject more uncertainty than confidence into the markets.

What’s driving the bond market’s sudden shift? For starters, the Trump administration’s ongoing tariff wars—particularly against close trading partners like Canada and Mexico—stoke fears of a new inflationary shock and further disruption of global supply chains.

The equity markets have taken note, with last week’s sell-off extending even after Trump delayed new tariff hikes on Mexico and Canada (again). At the same time, Trump’s aggressive budget cuts—shedding tens of thousands of federal jobs—fuel concerns that the U.S. economy could stall rather than surge under his leadership.

The recession risk is increasing because of Trump’s sequencing—tariffs first, tax cuts second. Yet, in classic Trump fashion, he insists that everything is just fine, dismissing market concerns as part of a necessary “transition period.” On Sunday, he reassured investors that the U.S. economy was adjusting, attempting to downplay fears of an impending slowdown. Notably, bond markets reacted immediately—Treasuries rebounded in Asian trading, with the benchmark 10-year yield dropping three basis points to 4.27%.

Trump’s economic turbulence has put the Fed in an increasingly uncomfortable position. Already wary of political interference, the central bank must now navigate a precarious path between managing inflation and preventing a recession.

Historically, when market sentiment shifts towards slowdown fears, the Fed steps in with rate cuts. But the problem this time? Inflation refuses to cooperate.

• The latest Consumer Price Index (CPI) data, set for release this week, is expected to show annual inflation at 2.9%—well above the Fed’s 2% target.
• Despite weaker economic indicators, Fed Chair Jerome Powell has remained hesitant about cutting rates too soon, warning last Friday that the economy remains in “good shape” despite “high levels of uncertainty.”

So, the Fed is now stuck between a rock and a hard place. If it cuts rates too soon, it risks fueling inflation. If it waits too long, it could preside over an economic contraction of Trump’s own making.

Global investors are not going unnoticed by Trump’s economic missteps. One of the biggest red flags came last week, when bond markets in the U.S. and Europe—which often move in tandem—suddenly diverged.

• German bond yields rose, buoyed by expectations that Europe would ramp up defence spending to compensate for America’s retreat from supporting Ukraine.
• Meanwhile, U.S. Treasury yields barely moved, reflecting growing uncertainty about the stability of Trump’s economic policies.

Clearly, the markets are watching—and not buying into Trump’s economic fantasy.

Adding to the unease is Trump’s fiscal recklessness. His tax-cut obsession is once again threatening to explode the deficit, forcing the government to borrow more and likely keeping interest rates higher for longer.

• The U.S. budget deficit is already on an unsustainable path.
• If Trump pushes for another round of tax cuts while waging costly tariff wars, the Fed may have to keep interest rates elevated to finance the growing deficit.

Let’s not forget the global picture. While Trump is busy playing economic roulette, China and other global players are watching closely. Beijing has already slapped retaliatory tariffs on U.S. gas exports—a direct hit to America’s booming LNG sector. The risk? If Trump’s trade war escalates further, the damage could spill into the broader economy, undermining little growth momentum.

At this point, markets can tolerate Trump’s economic unpredictability just as long as confidence in U.S. assets remains intact. Historically, when recession risks rise, U.S. bonds benefit as investors seek safety.

But there’s a breaking point. If the Federal Reserve loses credibility—say, if Trump starts openly pressuring Powell to cut rates ahead of an election-year slowdown—then the entire house of cards could come crashing down.

For now, Wall Street is watching. However, if the tide of confidence turns, Trump’s economic experiment could quickly spiral into a self-inflicted crisis. In that case, the R-word won’t just be whispered—it’ll be shouted from every trading floor.