The situation is dramatic. The interest rates the US government must pay on its massive debt are skyrocketing. Capital markets fluctuate alarmingly, sometimes going from positive to negative in an hour – trillions of dollars in assets have been destroyed in a matter of weeks. The yield on 10-year treasury bonds has already approached the five percent level.
At this point, the US president announces a U-turn and tries to ease the situation – this is what the beginning of spring 2025 looked like.
During the crisis in the spring of 2025, the idea of TACO-Trades was born, an unflattering phrase according to which Trump always retreats/cowards (Trump Always Chickens Out, TACO) and it is worth taking advantage of low prices on stock exchanges to buy additional shares. However, the word “always” does not indicate when exactly Trump will withdraw, and that could have a huge impact on markets.
The events of March 2026 seem to follow the same scenario. A year ago, it was the threat of a trade war that caused panic on global stock exchanges, this time it was the impending energy crisis resulting from the war with Iran, already compared by some to the oil crises of the 1970s.
Over the weekend, the leader at the White House first gave Iran a 48-hour ultimatum: lift the blockade of the Strait of Hormuz or face attacks on Iranian power plants – a threat to which Tehran responded with aggressive counterthreats. Then on Monday, Trump unexpectedly announced that the deadline would be extended by five days due to “the talks going well.”
Although the Iranians said they had not held any talks with the government in Washington, markets temporarily calmed down as they saw that for now there would be no further escalation around the important sea route through which one-fifth of all oil shipments pass. How this conflict will play out remains completely open, but once again bond markets have shown just how powerful they are.
When countries take out debts, these bonds are traded on capital markets until maturity. Although individual bonds typically have a fixed interest rate (coupon), as old bonds compete with newly issued bonds, their prices fluctuate. If the coupon is lower than what the new bonds offer, the rate falls, and if the coupon is higher, the rate increases accordingly.
It also works the other way around: if market participants lose confidence in the state's ability to reliably repay the debt in the long term or expect higher inflation, they sell bonds and their price drops sharply. It is this latter circumstance that is the main reason for the current poor condition of bond markets. As a result of the war-induced rise in oil and gas prices, inflation expectations skyrocketed in just a few weeks.
Holding fixed interest securities that are below inflation no longer seems attractive. Therefore, Deutsche Bank Research has just increased its forecast for consumer price growth in April to 3.8%. In May, Deutsche Bank experts expect inflation of up to four percent. In February, consumer prices increased by only 2.4%.
Inflation threatens Trump's agenda
A jump to four percent. should be a temporary phenomenon for now, but due to the war with Iran, more and more market participants are preparing for a long-term higher monetary devaluation and are demanding higher interest rates from the US government as compensation for the risk. And therein lies the problem for politics. For highly indebted countries such as the US, there is always the possibility of a vicious circle.
Higher interest rates mean higher costs, and higher expenses mean ceteris paribus (Latin: other things being equal), require the incurring of further debts if the state wants to meet its various obligations without increasing taxes and fees. Because the Trump government has ruled out tax and fee increases and has even promised that citizens and businesses will experience financial relief, a sharp rise in interest rates threatens to derail this very policy agenda.
The US financial situation has not improved at all. In the spring of 2025, the United States' national debt was just over $36 trillion. (PLN 132,699,765 billion at the current exchange rate), and has now exceeded USD 39 trillion. (PLN 143 trillion 739 billion 570 million). With such high debt levels, each ten basis point (0.1 percentage point) increase in interest rates translates into an additional burden of $39 billion. (PLN 143,739 million) annually.
To put this in context: the US Department of Defense just asked Congress for an additional $200 billion. (PLN 737 billion 126 million). The increase in interest rates since the war began on February 28, 2026 is 40 basis points, which could mean an additional burden of $156 billion. (PLN 574 958 million).
These are all strong arguments for changing course, but it does not mean that TACO is certain. Even if 156 billion sounds like a lot, the United States, as the world's largest economy, would certainly be able to cover this amount. Moreover, the current level of interest rates, which is 4.36%. for 10-year US treasury bonds, is still well below the critical level of five percent that forced a policy change at the time.
What led to a big shift in thinking last year was the withdrawal of international investors from the dollar
– says Carsten Brzeski, chief economist at ING bank. It also always depends on who or what exactly is causing the increase in interest rates. Last year, the American currency weakened significantly in a short period of time, this year the dollar is in demand on currency markets, because the “petrodollar” is needed to buy oil and gas on commodity exchanges, regardless of the price. — As long as higher interest rates are the result of inflation expectations and central bank actions, the TACO scenario is less likely, adds Brzeski.
There is one more argument against calling off the alarm and prematurely celebrating Trump's withdrawal from the conflict with Iran. Although the United States is heavily indebted, with its debt ratio exceeding 120 percent. their economic strength, as a large energy exporter they remain relatively resistant to shortages. Part of their economy even benefits from it. As the home of the world's currency, the dollar, America could continue to weather the current market storm for a long time.
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A worry for Europe
However, this does not apply to other countries. Europeans in particular have to worry about financing costs. Due to energy concerns, Britain had to pay more than five percent for the first time since the 2008 financial crisis. interest on its 10-year treasury bonds. At the same time, Italy, a euro zone country, recorded a sharp increase in yields to four percent. At the end of February 2026, the Italian state could take out debts at an interest rate of 3.3%, i.e. on equally favorable terms as France. Last year, investors assessed Italy as more stable than its western neighbor.
This also applies to Germany: for the first time since 2011, investors expect a three percent yield on 10-year securities from the German state. Given the massive debt package the federal government has put together, this means massive additional spending without any financing. Financial experts already consider the significant increase in German government bond yields since the beginning of the war with Iran dangerous.
As economist Friedrich Heinemann from the Center for Economic Research in Europe (ZEW) told the Reuters news agency, the current increase in the yield of German government bonds is easy to bear in the short term. “Nevertheless, the increase in profitability is worrying,” he added. Previously, German government bonds were considered a safe haven and during wars they rather benefited from rising rates, which resulted in lower yields. This no longer applies. “In the long run, the costs may therefore be much higher,” warns the expert in the face of approximately EUR 3 trillion (PLN 12 trillion, 812 billion) of debt from the federal, federal states and municipalities.
In the coming years, total liabilities may increase to the level of EUR 4 trillion (PLN 17 trillion 83 billion) due to the special fund and debt-financed defense spending. The states and municipalities would have to pay even higher interest rates than the federal government. “Germany is therefore heading towards interest costs at all levels of 120 to 150 billion euros (PLN 512-640 billion) per year,” Heinemann said.
The problems of Europeans do not have to worry US President Donald Trump. Investors therefore hope that the general situation on the stock exchanges will prevent the escalation of the conflict in the Persian Gulf.
Currently, it seems that a sharp decline in stock markets could prompt Trump to take action
– says Brzeski.
In recent days, not only European and Asian stock markets have collapsed, losses have also been reported on Wall Street. — An increase in inflation combined with a simultaneous loss of the value of shares that private investors also hold in retirement accounts (so-called 401k) could cost the president important support even among his own supporters, the economist speculates.
But is this really enough to play the TACO card? This is Donald Trump's secret. Meanwhile, the situation remains dramatic.
I’m Ashley Davis as an editor, I’m committed to upholding the highest standards of integrity and accuracy in every piece we publish. My work is driven by curiosity, a passion for truth, and a belief that journalism plays a crucial role in shaping public discourse. I strive to tell stories that not only inform but also inspire action and conversation.
