The bond market humbles Donald Trump

One scoop to start: The Trump administration is threatening to terminate hundreds of billions of dollars’ worth of consulting contracts, after finding US firms’ proposals for savings to be “insulting”.

And another scoop: Italian fashion group Prada is closing in on the purchase of Versace after negotiating a discount of more than $200mn, due to the impact of US President Donald Trump’s trade war.

In today’s newsletter:

Bonds beat tariffs — this time

Cracks in the European credit market

The deals closing through the turmoil

‘The bond market right now is beautiful’

On Tuesday evening in New York, as the yields on US and Japanese government bonds surged, many financiers had flashbacks of the 2008 crisis.

While Wall Street has changed enormously since then, JPMorgan chief Jamie Dimon has again emerged as the banking industry’s statesman.

Dimon deftly used an appearance on Fox Business on Wednesday morning to reach US President Donald Trump and convince him to step back from a trade war that threatened to push financial markets into the abyss.

Dimon said the pause would allow US Treasury secretary Scott Bessent time to negotiate a trade deal. He presented his message softly, but made the stakes clear.

“I am taking a calm view but I think it could get worse if we don’t make some progress here,” said Dimon, who acknowledged he believed the US economy would soon enter a recession.

Hours later, Trump paused his trade war and reduced most planned tariffs dramatically, a snap decision that sent financial markets soaring. The Nasdaq gained the most in years and recovered much of a weeklong stock slide.

Later, Trump admitted that he was watching bond markets unravel and was convinced to put most tariffs on a 90-day hiatus by Dimon. The banking CEO who brokered the rescue of Bear Stearns in 2008 again showed his power.

Another person said Bessent steered Trump’s focus towards China — and mending ties with America’s historical allies.

“Scott proved to be really smart, smarter than most people expected,” said one Wall Street executive close to the White House. “Others in the administration, involved in the tariff calculation, proved to be less smart,” they said wryly.

As it usually does, the bond market flexed its muscle.

People close to Trump noted the sell-off of Treasuries concerned the president and led him to consider options to ease pressure on the economy.

“Trump is fine with Wall Street taking a hit but he doesn’t want the whole house to come down,” said one confidante.

For those confused why there was so much focus on Treasuries, let’s take a moment to break it down. The US bond market is the backbone of the country’s economy. And as Trump’s trade war kicked in at the stroke of midnight on Wednesday, it began to seize up.

When there’s turmoil in financial markets, investors usually seek the safety of Treasuries. But this time they were selling off — and sharply.

Hedge funds played a role here. A common “relative-value” strategy that some funds employ is something called the basis trade. This involves selling Treasury futures and buying Treasury bonds, skimming off a small, typically risk-free premium of a few basis points in the process.

Since these trades are thought of as very safe, they usually have a huge amount of leverage. So when Treasuries unexpectedly sold off in a major way these last few days, it triggered a cyclical loop of liquidations, margin calls and more liquidations across the hedge fund industry.

While Trump wanted to rattle the US’s trading partners, he likely didn’t plan on a full-blown meltdown. Ultimately, a call had to be made.

Many will argue the market humbled Trump. Yet while Trump’s pause on his trade war is an enormous relief for Wall Street, it will not be a panacea.

“This is part of a negotiation, it’s the biggest game of chicken ever and Trump is winning,” said one financier close to the president.

Credit fears spread to Europe

Before Trump caved and announced a 90-day pause on tariffs, things started to get real — really fast — in European credit markets.

Riskier debt markets on the other side of the Atlantic had largely shrugged off the president’s sabre-rattling over an all-out trade war at the start of the week.

US stock market moves seemed to do little to worry bond fund managers in London, Frankfurt and Geneva.

But on Wednesday the closest thing the European high-yield bond market has to a “fear gauge” shot dramatically higher.

The spread on the iTraxx Crossover index, which measures the cost to insure junk-rated companies against defaults, surged to more than 420bp, a cool 100bp from where it started the year and its highest level in 18 months.

While the sharp rise in the index didn’t translate to disorderly or large sales of junk bonds, one LBO debt deal was definitely caught out.

A group of banks running a €2.2bn loan deal backing Bain Capital’s acquisition of facility management company Apleona had to offer higher interest rates to potential investors to compensate for the market turmoil on Wednesday.

Banks have underwritten mercifully few European LBO deals in recent months, making the potential for a slew of hung deals low.

But the incident is a reminder that the continent’s dealmakers aren’t immune to the aftershocks of the chaotic policymaking happening stateside.

Dealmaking in Trump’s trade battle

Trump’s “liberation day” has certainly freed up dealmakers, who have seen many of their transactions put on ice in the wake of the tariff-induced market turmoil.

First it was IPOs, a wave of which was postponed late last week, including Klarna and StubHub. 

Now, the broad shift under way is starting to have an impact on takeovers. 

Advisers and private equity investors tell DD that some of their deals are being put on hold given the heightened volatility. Nevertheless, some M&A is still trickling through. 

On Wednesday, the Swedish PE group EQT announced two deals, selling a €3bn stake in its software company IFS at a €15bn valuation, and offloading Karo Healthcare to KKR for €2.6bn.

Those types of businesses had been in months-long sales processes and may have been relatively insulated from the impact of tariffs.

They also reflect the emphasis that private equity groups have placed on doing deals to recycle their funds amid a broader slowdown.

Still, other deals are being renegotiated or reviewed.

The Italian fashion group Prada is closing in on the purchase of Versace after negotiating a discount of more than $200mn due to the impact of Trump’s trade war in a deal that could be announced as soon as today.

And US coal producer Peabody Energy is “reviewing all options” on its $3.3bn deal to buy Anglo American’s coal assets after an explosion forced one of the mines to shut down.

It all marks a far cry from January, when dealmakers hoped Trump would unleash “animal spirits” to pursue M&A.

While the initial level of transactions this year was not as high as hoped for, DD assumes that was preferable to the new chill settling over activity.

Job moves

Barclays has hired Andrew Woeber as global head of mergers and acquisitions in New York. He was previously a partner at Centerview. 

Tikehau Capital has named Maxime Laurent-Bellue as deputy chief executive and will continue to co-lead the firm’s credit platform. He has worked for the firm since 2007. 

Clifford Chance has hired David Feldman as a partner to co-lead its global restructuring and insolvency practice. He was previously the co-chair of restructuring at Gibson, Dunn & Crutcher.

Weil Gotshal & Manges has hired Simon Saitowitz as a partner for its private equity group. He was previously a partner at Ropes & Gray.

Smart reads

Darwinian ethos Meta shifted its approach towards redundancies earlier this year when it labelled staff as low performers, the FT reports. But that tactic has its dangers — for employers and the industry at large.

Debt opportunists As turbulence strikes Wall Street’s banks, risk-tolerant direct lenders are swooping in, Bloomberg reports. At least, for now.

iTariff As Apple faces one of the biggest threats to its business in years, the iPhone maker is turning to India to help ease pain inflicted by tariffs, the FT writes.

News round-up

Musk’s Starlink in new spat over access to Canada subsidies (FT)

British Steel prepares to idle one of its two blast furnaces (FT)

US tripling of small-package duties delivers further blow to Shein and Temu (FT)

Walmart warns tariffs have made profit outlook less predictable (FT)

Price of Wimbledon tennis debenture seats jumps 59% to £73,000 (FT)

Volkswagen overcomes China EV slump by doubling European sales (FT)

EQT sells €3bn stake in software group IFS defying chill in deals (FT)

Bank of England warns of possible ‘further sharp correction’ in markets after tariff turmoil (FT)