Wall Street was shaken on Wednesday as concerns regarding mounting government deficits and softening demand for US debt sent sharp falls in both bond and stock markets. The Dow Jones Industrial Average fell 817 points, or 1.9%, the S&P 500 declined 1.6%, and the Nasdaq Composite declined 1.4%. Simultaneously, bond yields soared as the 30-year Treasury yield climbed to 5.089%—its highest since October 2023, the Wall Street Journal said.
The selloff came after a disappointing $16 billion sale of 20-year Treasury securities, which attracted softer-than-anticipated demand and traded at a higher yield than market players expected. The poor reception to the auction intensified prevailing concerns about how much of Washington’s growing debt investors are willing to take on, particularly against Trump’s broad new fiscal package.
Deficits and inflation fears collide
Investors have been growing uneasy about the implications of Trump’s multitrillion-dollar tax and spending proposals, which many believe could significantly widen the federal deficit. That concern was amplified last Friday when Moody’s Ratings downgraded US debt, stripping it of its triple-A rating and citing unsustainable debt levels.
“Rates are increasing for the wrong reasons,” said Larry Adam, chief investment officer at Raymond James. “It’s not due to a booming economy—it’s due to deficits and inflation risks.”
Bond yields, inversely related to prices, have been consistently rising not only in the US but also in overseas markets such as Japan and Europe. Across-the-board investors are factoring in increasing deficits and possible inflation, placing a widespread dampening pressure on bond demand and fuelling equity market volatility.
Stocks no longer turning a blind eye to fiscal risks
For weeks, the equity market had been relatively unfazed by warnings of mounting yields and increasing deficit alarms. Wednesday’s soft bond auction, however, was a wake-up call, and this prompted a sharp drop in equities when investor sentiment turned against them.
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The sudden swoon followed a brief stretch of relative tranquillity in which stocks had recovered April losses, lifted by diminishing concerns about an imminent trade war. But with yields still rising and fiscal peril building, that optimism seems to be slipping away.
The 20-year Treasury bond—introduced back in Trump’s first term—has never quite been able to muster the same investor demand as other maturities. Its above-average yields indicate that lingering doubts about long-term US borrowing capacity continue.
Stagflation fears resurface
The mood of the market has also been clouded by increasingly high risks of stagflation—combination of slow growth and inflation. Trump’s recent across-the-board increases in tariffs have raised costs for consumers and retailers. Walmart has indicated future price hikes, while Target’s stock fell 5.2% on Wednesday following warnings from executives about weakening consumer demand and confidence.
Target CEO Brian Cornell referenced “five consecutive months of decreasing consumer confidence” and underscored the uncertainty of tariffs. The retailer, as with others, is trying to minimize price hikes but is dealing with an increasingly challenging economic landscape.
Lawmakers push ahead despite market concerns
Earlier this spring, a sudden bond-yield spike brought on by investor panic into US assets temporarily led Trump to hesitate on tariff escalation. This time around, though, the market message might go unheard in Washington. Members of Congress are still bent on proceeding with a mix of tax cuts and spending initiatives, even as financial markets send warning signals.
As the 30-year bond yield rises above 5%, the cost of borrowing is inching up toward levels that promise to choke government and corporate balance sheets. If pressures in the markets intensify, policymakers will be compelled to face the hard choices between fiscal stimulus, inflation, and investor sentiment.
For the moment, though, Wall Street is preparing for still more volatility as investors reconsider their bets amid larger deficits, softening demand for bonds, and growing economic uncertainty.