Morning from Copenhagen.

The usual cross-asset dynamics have simply broken down, making markets incredibly hard to trade. There’s no longer a clear causal link between events, headlines, and the subsequent reaction in asset prices. We’ve landed in a strange doom-loop where every dip in risk sentiment triggers a selloff in the long end of the yield curve—led by bond vigilantes testing if either Trump or Powell will blink. Meanwhile, the USD continues to sell off.

We saw that Trump had a pain threshold around 4.5% on the 10-year yield—or at least someone close to him did. But now the question is: what happens if yields keep climbing?

If markets successfully tested whether higher yields would force a policy reversal—be it due to debt refinancing pressures, basis trade risk, or political optics—they’ve arguably seized some control over the stance of U.S. policy. Trump is increasingly caught between China and the bond market. Yesterday, it looked like he had ceded some power to Wall Street and the bond market. But today’s renewed tariff aggression toward China, combined with reports that he’s exploring ways to gain more direct influence over agency heads—and possibly FOMC members—feels like a giant middle finger to those who pressured him into backing down.

So, will markets now double down and test again?

It’s a long shot—but not implausible—that traders might push further to provoke another policy rollback from Trump, and potentially Powell. This is the clear risk now: that fiscal credibility fears outweigh the usual macro arguments for lower yields. The recent price action in both bond yields and the USD feels eerily similar to the GBP/gilt spiral under Liz Truss—or like the behavior you’d expect from emerging market currencies and bond markets.

That the USD is increasingly trading like an EM currency—something we’ve only seen in rare instances over the past few decades—is likely also why EURUSD remains bid. Investors are simply looking for an alternative in this policy circus. And can you really blame them?

Chart 1: Historic Decoupling Between the USD and Bond Yields