Trump’s tax bill adds to bond market’s woes
After the tariff scare, Treasury yields are on the rise as investors focus on the worsening fiscal outlook.
Key takeaways
- Treasury yields are rising amid mounting concerns about an unsustainable fiscal outlook and stubborn inflation.
- Higher yields are a sign that investors see more risk in investing in US debt and are demanding a higher premium to compensate for that risk.
- Strategists say yields could remain elevated if the fiscal picture doesn’t change.
- Higher yields mean higher mortgage rates and could hurt stock valuations.
The bond market is looking jittery again, thanks to President Donald Trump’s new tax bill. Hand-wringing over the United States’ fiscal deficit is nothing new, but the legislation’s advance in Washington this week has set investors on edge, sending yields to their highest levels in months. If passed, the bill would cut taxes without significantly slashing spending, and experts estimate that it would add more than $3 trillion to the deficit over the next decade.
Fueling the fire are lingering concerns about stubborn inflation and the dwindling odds of interest rate cuts from the Federal Reserve, along with cracks in investor confidence around the safety of US government debt thanks to Trump’s trade policies. The bond market has seen wild swings this year since Trump launched his trade wars, which have heightened expectations that the US economy will fall into recession, even as tariffs are likely to spark higher inflation.
“We’re in the midst of a pretty big reset in policy, and therefore in markets,” says Kathy Jones, chief fixed income strategist at Schwab. Strategists believe yields could remain elevated if the fiscal picture doesn’t change. That would have implications across the economy, from higher mortgage rates to lower valuations across the stock market.
“The combination of gaping deficits throughout the forecast horizon, potential fiscal stimulus, and sticky inflation isn’t friendly for the bond market,” wrote Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, on Wednesday. “If at least one of those three drivers doesn’t change, look for the uptrend in yields to continue.”
Yields have been ticking up for weeks, but a recent downgrade of US debt from the ratings firm Moody’s and a weak Treasury auction on Monday sent them higher still. The most dramatic moves have come from longer-dated bonds, which track expectations about the growth and the path of the economy over the long term. However, short-term yields have also been rising recently.
The yield on the 30-year Treasury topped 5% on Wednesday (its highest level since 2023), and it kept climbing during Thursday’s trading session. The 10-year yield closed at 4.58% on Wednesday, its highest level since February, while the 2-year yield was 4.00%. Shorter-term yields are more closely tied to Fed policy and overnight rates, and they’ve moved less than their counterparts.
The phenomenon isn’t confined to the US. Japanese bond yields have spiked, as have yields in the United Kingdom and other developed markets.
Why are bond yields rising?
The US government finances deficit spending by issuing Treasury bonds. The concern among investors is that the current path of policy—tax cuts and trade protectionism—will require the issuance of more bonds than the market can support. A handful of bond auctions this week gave investors the opportunity to air that concern; they demanded higher yields to compensate for what they see as mounting risks associated with US debt. Issuing bonds with higher yields increases the government’s interest expenses and puts even more pressure on the US balance sheet.
If there isn’t enough demand from investors to buy all the debt the US government issues, or if investors continue to see mounting risks when it comes to that debt, bond prices could continue falling and yields could climb higher. A higher-inflation environment could also dent demand in the bond market and put upward pressure on yields, since inflation eats away at investors’ future earnings.
Why are bond investors worried?
That has broad implications for American consumers and businesses. Jones explains: “If yields go up, that means the cost of everything goes up for borrowers.” That “everything” ranges from mortgages to small business loans to credit cards. “It’s all based off of the bond market.” Home sales have declined this spring as mortgage rates remain elevated and the outlook for the economy remains uncertain.
Jitters in the bond market could spill into other asset classes like equities and currencies. If bond yields are elevated, for instance, stocks may lose some appeal for investors, since they can capture a higher return in Treasuries with less risk. The US dollar has steadily lost value since the beginning of 2025, thanks both to Trump’s new tariffs and larger concerns about the path of fiscal policy.
More government borrowing and the inflationary impact of higher tariffs could also prompt the Fed to leave interest rates higher for longer than investors expected even just a few weeks ago. Bond futures markets are already paring back the odds of rate cuts in 2025. Traders see a 25% chance that the Fed’s first cut comes in July, according to the CME FedWatch Tool—down from 37% a month ago.
Also concerning is the timing of new deficit spending. Typically, the federal government tightens its purse strings when the economy is growing and saves major deficit spending for downturns when the economy needs a boost.
Despite the threat of tariffs, the economy is still on solid footing. “Usually, when the economy is doing well, you want to let growth outstrip spending because you can afford to,” Jones says. “We’re not doing that.” She adds that she doesn’t see disaster ahead, even with a rising deficit. The US is the largest economy in the world; it can finance new debt. “That’s not the issue here,” she says. Rather, “it’s our willingness to tackle it.”
Will yields stay high?
If the fiscal outlook remains as it is, strategists say bond yields could keep climbing. “There’s room for yields to keep pushing higher,” Jones says. She expects yields to eventually reach a level attractive enough for buyers to step in and stop the selloff, but she doesn’t think the market is there yet. “You may need more yield to get them to do that, given the outlook for rising deficits as far as the eye can see.”
While 5% yields on the 10-year Treasury seemed far-fetched at the beginning of the year, Jones believes it’s now more likely. “I do think you’d see some buying at that stage of the game,” she says. 10-year yields last approached that level in October 2023.
What should investors do?
Jones favors bonds with intermediate durations or lower—around the five-year mark. Duration is a measure of how sensitive a bond’s price is to changes in interest rates. Jones cautions investors against holding too much cash and suggests they look to higher-quality options beyond Treasuries, like investment-grade corporate bonds. She also points to municipal bonds as fertile ground for investors looking for tax benefits.
