The bond market sent a clear warning to President Donald Trump and congressional Republicans this week, as demand for US Treasury bonds fell to its lowest level since February during a 20-year bond auction on Wednesday. Investors sought higher yields, signaling they wanted more compensation for the risk of lending to the US government. This poor demand suggests that the Trump agenda, particularly the “Big, Beautiful Bill,” has made America an unacceptably risky investment.
Investors may not continue to fund the government’s coffers unless they get paid more for it. As a result, long-term Treasury prices fell further, with the 10-year Treasury yield rising above 4.61% and the 30-year climbing to 5.14%, its highest level since October 2023. Wall Street is beginning to react, with the Dow remaining flat on Thursday following the auction results, while the S&P 500 fell 0.1% and the Nasdaq inched up by 0.1%.
These bond market movements could soon extend to Main Street, affecting everyday Americans. Several factors are driving bond prices down and yields up, including concerns about inflation, rising global yields, and growing US debt, partly due to the tax cut bill. George Saravelos, head of FX research at Deutsche Bank, noted that the weakening dollar alongside rising yields is “a clear signal of a foreign buyer’s strike on US assets and the associated US fiscal risks.”
The turmoil in the bond market prompted Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick to persuade Trump to temporarily reverse course on his “reciprocal” tariffs on dozens of countries.
Bond yields cause market unease
However, debt hawks within the Republican party have voiced concerns about the bill’s potential to add nearly $4 trillion to America’s $36 trillion debt. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, expressed frustration that lawmakers passed the bill less than a week after America’s latest credit downgrade and another worrying Treasury auction.
“Will nothing wake our leaders up to the need to take our debt challenges seriously?” she asked. Treasury Secretary Bessent has dismissed concerns about higher rates and the Moody’s downgrade, arguing that the economic benefits of the tax cuts will outweigh the resulting debt problems. However, if bond investors continue to demand higher yields, financing America’s debt will become significantly more expensive, potentially jeopardizing future safety net programs and leading to cuts in Medicaid.
Higher bond rates will also impact everyday Americans, as loans pegged to Treasury yields, such as mortgages, credit card rates, and auto loans, are rising. This could slow the economy, counteracting the intended stimulus effects of the tax cut bill. According to Saravelos, there are only two solutions to this problem: either the US must sharply revise the current reconciliation bill to result in a credibly tighter fiscal policy, or the value of US debt must decline materially until it becomes cheap enough for foreign investors to return.
He warns to “brace for more volatility” in the bond market.
