The bond market sent a clear warning to President Donald Trump and congressional Republicans on Wednesday as investors showed reluctance to buy US government bonds. The Treasury Department reported that demand for 20-year bonds hit its lowest level since February, with investors seeking higher yields for the perceived risk of lending to the US. This sentiment pushed long-term Treasury yields higher, with the 10-year Treasury rising above 4.61% and the 30-year surpassing 5.14%, its highest level since October 2023.
The weak demand indicates that investors believe the Trump administration’s agenda, including a significant tax cut bill, has made the US a riskier investment. Stock market reactions were mixed, with the Dow flat, the S&P 500 falling 0.1%, and the Nasdaq gaining 0.1%. However, the broader implications could soon impact Main Street as bond prices fall and yields rise, driven by factors such as continued inflation concerns and global competition for US bonds.
Renewed worries about US debt, fueled by the tax cut bill, have raised fears that foreign investors may shy away from US Treasuries. George Saravelos, head of FX research at Deutsche Bank, noted that a foreign buyer’s strike on US assets signals significant fiscal risks.
Bond market concerns on US policies
Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick have influenced a temporary reversal of some of Trump’s tariffs, but the Republican party remains divided. Debt hawks are troubled by the Congressional Budget Office’s report predicting the bill would add nearly $4 trillion to the national debt, now at $36 trillion. Despite these concerns, Bessent downplays the risks, focusing on the economic benefits of the tax cuts.
However, increased borrowing costs could jeopardize future safety net programs and prompt discussions about substantial Medicaid cuts. Higher bond rates will also affect everyday Americans by driving up interest rates on mortgages, credit cards, and auto loans, potentially slowing the economy and undermining the hoped-for boost from the tax cuts. As bond market volatility continues to ripple through the economy, Americans are already feeling the effects, with mortgage rates at their highest level in over three months.
Saravelos warns that there are only two solutions to this problem: either the US has to sharply revise the current reconciliation bill to result in credibly tighter fiscal policy, or the non-dollar value of US debt has to decline materially until it becomes cheap enough for foreign investors to return. He advises bracing for more volatility in the coming days.
