Wall Street is closely watching the bond market following a recent surge in long-term Treasury yields as investors reevaluate the US fiscal outlook in light of President Trump’s proposed tax legislation.
The 30-year Treasury yield (^TYX) climbed to 5.15% last week, nearing its highest levels since 2007 as a combination of fiscal concerns, fiscal instability in Japan, and a weak Treasury auction pressured the US bond market.
The 10-year Treasury yield (^TNX), meanwhile, had pressed above 4.6%, its highest level since February.
Although yields eased slightly on Tuesday after reports said Japan’s central bank might reduce its bond issuance, investor anxiety remains high.
“Equity investors’ priority has shifted to long-term interest rates in reaction to 30-year yields rising to an 18-year high,” Citi analyst Stuart Kaiser wrote in a note to clients on Monday. “Unfortunately, the reconciliation process seems destined to increase a US deficit that already stands above 6% of GDP and similar moves in Japan and UK bonds reinforce these market concerns.”
Concerns stem from a combination of fiscal challenges, persistent inflation, and political uncertainty, all heightened by Trump’s newly advanced tax bill.
“We’re concerned about the 10-year and the 30-year in particular as it pertains to the fiscal position, and that makes it much more difficult to forecast,” AllianceBernstein chief economist Eric Winograd told Yahoo Finance on Tuesday.
Historically, Treasury yields have followed the business cycle and expectations for Fed policy. But with the Trump bill projected to add $4 trillion to the national debt over the next decade, fiscal risk has become a key driver of long-term rates.
The legislation proposes sweeping cuts to individual and corporate tax rates but lacks substantial spending cuts, deepening investor concerns over the US’s already fragile fiscal situation. The bill, which cleared the House last week, is now headed to the Senate, where lawmakers could make significant changes to its provisions. Trump previously said he wants to sign the bill into law by July 4.
“There’s no evidence of fiscal restraint,” Winograd said. “If anything, we’re seeing additional fiscal deterioration.”
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.
While short-term yields have stayed relatively steady amid expectations that the Fed will hold interest rates steady, longer-term yields have climbed more sharply as investors demand greater compensation for the mounting fiscal and policy risks.
Chris Rupkey of FWDBonds raised concerns that 10-year yields could approach 6%, particularly if deficits grow faster than nominal GDP.
Long-term yields, such as the 10-year and 30-year, have a greater impact on the real economy than the Fed’s benchmark rate, since borrowing costs like mortgage rates are tied to these longer maturities.
Read more: What is the 10-year Treasury note, and how does it affect your finances?
“The rubber hits the road on bond yields when it comes to actual debt sales to the public,” Rupkey said in a note to clients on Monday. Given the current turmoil in Washington, he said a key question is whether investors will continue purchasing US debt without demanding higher yields in return.
The uncertainty surrounding fiscal policy is adding to broader market concerns about the trajectory of long-term yields, particularly as investors anticipate two rate cuts later this year.
According to Winograd, it will be “hard” for long-term rates to fall as they typically do during a rate-cutting cycle, underscoring a key challenge for the Fed as it considers easing policy amid rising fiscal and political uncertainty.
Even if the Fed lowers short-term rates to support growth, the impact could be blunted if long-term yields remain elevated and the yield curve steepens.
As Winograd said, “It makes it more difficult for the Fed to ease policy.”
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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