Bond markets are flashing warning signs again as long-term U.S. Treasury yields jumped sharply this week. Investors are growing uneasy about rising U.S. deficits and the fiscal outlook tied to President Trump’s recently proposed tax legislation.
Normally seen as a safe haven during uncertainty, bonds are experiencing a sell-off. This unusual move signals concerns about a broader “sell America” trend in global markets.
Jeremy Schwartz, Chief Investment Officer at WisdomTree Global, told Yahoo Finance, “Clearly, the market is hyper-focused on two key things: the tariff news, and the policy framework for debt, deficits and interest rates. If rates spike because of concerns about deficits, and we don’t actually reduce spending… that’s one of the key downside risks.”
Mix of Old and New Threats Fuel Investor Worries
Concerns about ballooning deficits are not new. However, the latest wave of unease reflects a mix of long-standing and fresh challenges, including fiscal risks, persistent inflation, and political uncertainty. At the center is Trump’s proposed tax bill, which passed the House this week and now moves to the Senate.
Shay Akabas, Director of Economic Policy at the Bipartisan Policy Center, said, “We have an unsustainable fiscal situation that’s causing a tough bond market and we’re having to pay higher interest rates to service our debt. That will ultimately lead to higher interest rates across the economy and fuel the inflation that we’ve seen over the last few years and that we’re likely to continue to see from the tariff dynamics that are going on.”
Tax Bill’s Impact on Deficits Raises Alarm
The bill proposes deep cuts to both individual and corporate tax rates. It is expected to add $4 trillion to the national debt over the next decade. Despite its scale, the bill’s lack of immediate and significant spending cuts has intensified investor worries about the nation’s fragile fiscal position.
Brett Ryan, Senior U.S. Economist at Deutsche Bank, noted, “The House bill will likely be the floor of the deficit. The Senate will have a say, which could mean less emphasis on spending cuts.” He also expressed doubts about the claimed $1 trillion in savings, much of which would not materialize until after the current presidential term. “Will that actually happen?” he questioned.
Bond Market Reacts Swiftly and Sharply
The bond market responded quickly. The 30-year Treasury yield surged to 5.15% this week. This marked its biggest intraday gain since 2023 and brought it close to its highest closing level since 2007.
The move was driven by renewed fiscal concerns in the U.S. and global factors. Weak Japanese government bond auctions and warnings from Japanese Prime Minister Shigeru Ishiba about fiscal troubles caused a bond sell-off. This added to worries about declining demand for U.S. Treasuries worldwide.
Global Uncertainty Raises Broader Economic Risks
Joe Hegener, Chief Investment Officer at Asterozoa Capital, described recent market moves as a “significant risk” to stocks and the broader U.S. economy. “We’re starting to see investors get a little spooked. What’s happening inside and outside of Japan is only exacerbating that risk,” he said.
Diverging Short- and Long-Term Yields Reflect Unease
While short-term yields have stayed relatively steady amid expectations the Federal Reserve will hold rates, long-term yields have risen more sharply. Investors are demanding higher returns to compensate for growing uncertainty around fiscal policy and economic outlook.
Heather Boushey, former member of President Joe Biden’s Council of Economic Advisers, warned that the yield surge could reflect fears of stagflation and deeper economic problems. She said, “There’s no good news here. The bond market’s message is clear: let’s not go down this road.”
In summary, U.S. bond markets are showing signs of stress due to concerns over rising deficits, fiscal policy uncertainty, and the impact of the new tax bill. The spike in long-term Treasury yields signals rising risks that could affect the broader economy. Investors and policymakers alike face a challenging path ahead.
