The bond market is once again flashing warning signs.
Long-term Treasury yields surged this week as investors grew increasingly uneasy about the ballooning US deficit and the fiscal outlook tied to President Trump’s proposed tax legislation.
The sell-off in bonds, typically a safe haven in uncertain times, runs counter to traditional flight-to-safety behavior and has stoked fears of a broader “sell America” trade taking hold across global markets.
“Clearly, the market is very focused on two key things: the tariff news and this policy framework of debt and deficits with interest rates,” WisdomTree Global chief investment officer Jeremy Schwartz told Yahoo Finance on Thursday. “If interest rates blow out because there’s fear about the deficit [and] we don’t actually bring down spending … that’s one of the [key] downside risks.”
While ballooning deficits have long been a concern, the latest wave of investor unease reflects a collision of both new and familiar threats, with fiscal fears, stubborn inflation, and political uncertainty top of mind. At the center of it all is Trump’s newly advanced tax bill, which cleared the House this week and is now headed to the Senate.
“We have an unsustainable fiscal situation that is leading to very challenging dynamics in the bond markets where we are having to pay higher interest rates to service our debts,” Shai Akabas, director of economic policy at the Bipartisan Policy Center, told Yahoo Finance on Friday.
“That ultimately is leading to higher interest rates across the economy and feeding the inflation that we’ve seen in past years, and that we might continue to see from the tariff dynamic that’s going on.”
The legislation proposes sweeping cuts to individual and corporate tax rates and is projected to add $4 trillion to the national debt over the next decade. Despite its scale, the bill lacks swift and substantial spending cuts, fueling investor anxiety over the US’s already fragile fiscal situation.
“The House bill is probably the floor for what deficits look like,” Deutsche Bank senior US economist Brett Ryan said. “The Senate is going to have its say, and that’s probably going to mean even less in terms of spending cuts.”
Ryan noted that while the bill claims over $1 trillion in savings, most of that is backloaded beyond the current presidential term. “Will it ever happen?” he asked, casting doubt on whether the proposed fiscal tightening will materialize.
