The U.S. bond market is once again showing signs of distress, raising alarms among investors and economists. Long-term Treasury yields rose sharply this week, driven by heightened investor concern over the expanding federal deficit and the fiscal direction tied to President Donald Trump’s recently proposed tax legislation.
Traditionally seen as a refuge during times of uncertainty, the bond market is behaving unusually. Investors are pulling away from U.S. Treasurys, signaling growing anxiety and triggering fears that a broader global trend to abandon U.S. assets—commonly referred to as the “sell America” trade—may be underway.
“Clearly, the market is very focused on two key things: the tariff news and this policy framework of debt and deficits with interest rates,” said Jeremy Schwartz, chief investment officer at WisdomTree Global, during an interview with 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.”
Concerns over growing deficits are nothing new, but the current unease is fueled by a combination of both longstanding and emerging threats. Investors are now juggling worries about government overspending, persistent inflation, and the unpredictable political landscape. At the heart of these concerns is Trump’s recently advanced tax bill, which successfully passed through the House this week and now awaits a Senate vote.
“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.
Akabas added, “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 in question introduces significant tax cuts, affecting both individual and corporate rates. Analysts estimate that the bill will increase the national debt by $4 trillion over the next ten years. What worries investors further is that, despite the massive tax breaks, the legislation does not propose immediate or meaningful spending cuts. This omission is intensifying fears regarding America’s already vulnerable fiscal health.
Brett Ryan, a senior U.S. economist at Deutsche Bank, commented, “The House bill is probably the floor for what deficits look like. The Senate is going to have its say, and that’s probably going to mean even less in terms of spending cuts.”
Ryan also expressed skepticism over the bill’s long-term fiscal promises, stating, “Will it ever happen?” in reference to the more than $1 trillion in projected savings, much of which would occur beyond the current presidential administration.
The bond market’s response to the proposed legislation was both immediate and severe. The 30-year Treasury yield spiked to 5.15% this week, marking the most substantial single-day rise since 2023. That level is approaching closing highs last seen before the 2008 financial crisis.
This spike wasn’t driven solely by domestic fiscal concerns. A poorly received Treasury auction and financial turbulence in Japan also played roles. Japanese Prime Minister Shigeru Ishiba’s warning about his country’s deteriorating financial position caused a bond sell-off there, which, in turn, stoked fears globally about diminishing demand for U.S. debt.
Joe Hegener, chief investment officer at Asterozoa Capital, described the volatility in the long end of the bond market as significant. “The long end of the curve, there’s a tremendous amount of uncertainty,” Hegener said on Friday. He added, “We’re starting to see investors get a little spooked. What’s going on in Japan and abroad is only exacerbating that risk.”
While shorter-term bond yields have remained relatively stable due to expectations that the Federal Reserve will not raise interest rates in the near term, longer-term yields are rising faster. This divergence reflects growing investor demands for higher returns to compensate for long-term risks tied to fiscal instability and erratic policymaking.
Heather Boushey, who previously served on President Joe Biden’s Council of Economic Advisors, sees the bond market’s recent behavior as a warning sign. “There is not good news here,” Boushey said. “Let’s not go down this path,” she added, suggesting that the financial markets are reflecting a growing concern about the direction of the economy, including potential stagflation—a combination of high inflation and stagnant growth.
Altogether, the bond market appears to be reacting to a convergence of troubling factors: ballooning federal deficits, a controversial tax proposal with unclear long-term savings, and international fiscal unrest. The result is a wave of anxiety that is causing U.S. bond prices to fall and yields to climb, a shift that could ripple across all sectors of the economy.
Investors, economists, and policymakers are all watching closely, as the implications of these market shifts could prove far-reaching. Rising long-term yields increase borrowing costs for the government, businesses, and consumers alike. If these trends persist, they could undercut economic growth, push inflation higher, and make it more expensive for the U.S. to service its growing debt.
With Trump’s tax bill headed to the Senate, the next steps taken by lawmakers could either reinforce or alleviate market fears. However, the current mood in the bond market suggests that confidence is already fragile. Whether this represents a short-term reaction or the start of a deeper financial reckoning remains to be seen.
In the meantime, experts like Jeremy Schwartz, Shai Akabas, Brett Ryan, Joe Hegener, and Heather Boushey are united in their message: the combination of tax cuts, deficits, and political instability is presenting serious risks. And if these are not addressed, the markets may continue to react in ways that could affect everything from interest rates to equity prices to global investor sentiment.
The warning from the bond market is growing louder by the day. As Boushey put it succinctly, “There is not good news here.”
