The bond market sent a clear message to Washington this week. The US Treasury’s 20-year bond auction on Wednesday was unusually weak. Demand for the bonds was at its lowest since February.
Investors demanded higher-than-expected yields. This signals that they wanted better compensation for the risk of lending to the US government. The poor demand suggests investors believe President Donald Trump’s agenda has made America a riskier investment.
His tax cuts are a particular concern. The lackluster auction means investors are becoming wary of continuing to fund the government’s spending unless they see higher returns. Following the auction, long-term Treasury prices fell while yields continued to rise.
The yield on the 10-year Treasury exceeded 4.61%. The 30-year Treasury eclipsed 5.14%. These are the highest levels since October 2023.
The stock market responded modestly to the news. On Thursday, the Dow remained flat, the S&P 500 dipped by 0.1%, and the Nasdaq gained 0.1%. Bond market concerns are already affecting ordinary Americans.
Bond prices have been falling, and yields rising, due to several factors. These include ongoing fears about inflation. Major companies like Walmart have announced price increases due to tariffs.
Inflation remains a hot topic. Adding to the complexity, yields have been rising globally. This creates competition for US bonds.
The “Sell America” trade has also gained momentum due to growing debt concerns linked to the tax cut bill. In this trade, US stocks and bonds become less attractive.
bond demand signals risk concerns
This has raised fears that foreign investors might shy away from US Treasuries. George Saravelos, head of FX research at Deutsche Bank, highlighted a troubling sign. The dollar is weakening despite rising yields.
This indicates a possible foreign buyer’s strike on US assets. Saravelos pointed out that foreign investors might no longer be willing to finance US deficits at current prices. This bond market volatility has spurred reactions from Washington.
Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick convinced Trump to reverse some tariff decisions to calm the markets. However, debt concerns persist. The Congressional Budget Office reported that the new tax bill could add nearly $4 trillion to the national debt.
Maya MacGuineas criticized the timing of the bill’s passage. MacGuineas is president of the Committee for a Responsible Federal Budget. She cited America’s recent credit downgrade and weak Treasury auctions as warning signs that have been ignored.
Bessent remains optimistic. He argues that the economic benefits of the tax cuts will outweigh the resultant debt issues. However, the US Treasury will need to issue more bonds with the impending rise in the debt ceiling.
If investors continue to demand higher yields, the cost of financing America’s debt will increase. This could potentially impact future safety net programs like Medicaid. Higher bond rates will also make loans more expensive for everyday Americans.
This includes mortgages, credit card rates, and auto loans. It could potentially slow down the economy. Ultimately, Saravelos sees two possible solutions.
Either a significant revision of the current fiscal policy to ensure tighter control over spending. Or a substantial devaluation of the US debt in non-dollar terms to attract foreign investors back. As the bond market reacts, Washington faces real pressure to reassess fiscal strategies to maintain economic stability.
