Greg McKenna
5 min read
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Long-term yields spiked earlier this week as traders scaled back their bets on rate cuts by the Federal Reserve and reacted to the new tax bill advanced by House Republicans. Bond vigilantes, who can bring fiscally irresponsible politicians to heel by unloading a country’s debt, may rear their head if Congress doesn’t show any appetite to bring the federal deficit under control.
Chaos in the bond market may have forced President Donald Trump to back off the reciprocal tariffs he initially unveiled on “Liberation Day” in early April. Another sell-off ensued this week as House Republicans moved forward on a “big, beautiful” bill of tax cuts, which would likely exacerbate an already ballooning deficit.
As the bill moves through Congress, however, so-called “bond vigilantes”—or investors who encourage fiscal discipline by unloading a country’s debt—could have a say. The yield on the benchmark 10-year Treasury, which rises as the price of the bond falls, closed above 4.5% for the first time since February on Wednesday.
The 30-year yield, meanwhile, almost touched the 5% mark, which it briefly hit the evening before Trump announced the 90-day pause on reciprocal tariffs last month. The president acknowledged he made the move after fixed-income investors had gotten “yippy.”
“So we are now reaching yield levels that previously seemed to trigger sensitivity from the U.S. administration,” Deutsche Bank strategists wrote in a note Thursday morning, “though the recent moves are much more orderly than they were in early April.”
Yields retreated markedly on Thursday, with the 10-year falling more than 10 basis points as inflation data came in cooler than expected and bond investors seized on a buying opportunity. Trump, of course, has been clear he wants to see long-term borrowing costs come down.
But yields primarily declined earlier this month because of recession fears, Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management, told Fortune. Investors then reversed course and piled out of bonds after an agreement with China to pause tariffs buoyed markets, with investors scaling back their bets on rate cuts by the Federal Reserve.
Then, Haworth said, long-term yields also began reacting to tax bill developments.
“I think the bond market has some concern that this is not quite as deficit friendly as they’d like,” he said.
The Biden administration spent its way out the COVID-19 pandemic, but it never shut off the fiscal pump. According to the Congressional Budget Office, the federal deficit for the 2025 fiscal year is $1.9 trillion, or 6.2% of GDP, the deepest shortfall in the country’s history outside of a war or recession.
