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The bond market is caught in a tug-of-war between the prospects of pro-growth stimulus from President Trump's sweeping tax bill and inflationary pressures from tariffs, leaving investors with few clear signals of where the economy is headed and rising long-term yields.
"We have policies that on the one hand will boost growth like expansive fiscal stimulus," Kathy Jones, chief fixed income strategist at Charles Schwab, told Yahoo Finance. "Then we have some that will slow growth, like tariffs. ... So the bond market is just caught in the middle."
As of Tuesday, the 30-year Treasury yield (^TYX) hovered near a still-elevated 4.96%, up more than 20 basis points since the start of the year. Meanwhile, the 10-year yield (^TNX) traded around 4.44%.
Long-term yields have climbed in recent weeks, driven by concerns over the US fiscal trajectory as Trump's tax legislation, estimated to add $4 trillion to the national debt over the next decade, heads to the Senate after clearing the House. Trump has vowed to sign the bill into law by July 4.
"We haven't seen this for decades," Jones said, pointing to the recent bond market moves as a reflection of "a lot of worries and uncertainty."
While short-term yields have stayed relatively steady amid expectations that the Fed will keep interest rates unchanged, longer-term yields have climbed more sharply as investors demand greater compensation for mounting deficits and heightened policy risks.
Read more: What are bonds, and how do you invest in them?
Historically, deficits have had little impact on Treasury yields, largely due to the US's economic dominance and its role as issuer of the world's reserve currency. But that dynamic may be shifting.
"It feels like we're hitting an inflection point," Jones said, warning that markets are demanding a greater risk premium.
Adding to the pressure, provisions in the proposed legislation, such as the Section 899 clause, could raise the cost of holding US assets for foreign investors. Jones warned that this may undermine a vital source of demand for Treasurys.
"Anything that discourages foreign investment in any way, shape, or form, whether it's direct investment or through financial instruments, is going to be negative," Jones said. "We run a large current account deficit. We need that capital inflow. And if we're not getting it, that's going to depress our economy, which means that yields have to rise to a level where foreign investors find them attractive."
