Jennifer Sor

Sat, May 17, 2025, 9:15 AM6 min read

• Market pros say Trump's tax bill could spark chaos in the bond market.

• That's because the deficit is a big concern for the "bond vigilantes."

• Another showdown between Trump and the bond market could be coming later this year.

Tariff chaos may have subsided, but markets could be in for another bout of policy-fueled volatility in the coming months if bond investors throw a tantrum over the tax bill.

President Donald Trump's "Big, Beautiful Bill"—the 389-page tax bill that aims to extend Trump's 2017 tax cuts—could add around $4 trillion to the US deficit over the next decade, according to a projection from the Tax Foundation, a non-partisan think tank.

While the bill stalled on Friday amid opposition from within the Republican party, it is likely that a tax bill will get done this year.

For bond investors worried about the sustainability of government spending and the safe-haven status of US Treasurys, any fiscal moves that add to the deficit are bad news.

So far, the bond market has been quiet. Yields are down this week as rate cut bets get repriced amid cooler inflation data.

But that could change quickly as the tax bill gets closer to becoming law.

Ed Yardeni, the president of Yardeni Research, predicted the yield on the 10-year US Treasury could spike as high as 5% as details of the tax bill get ironed out. A 5% yield is a key psychological threshold for the market and has sparked big sell-offs in stocks in recent years when that level has been reached.

"I think they're watching with great interest how that's unfolding," Yardeni said of the bond market, speculating another Liberation Day-type sell-off could occur in government bonds if Republicans try to push the tax bill forward in its current form.

Padhraic Garvey, the regional head of research for the Americas at ING, also said he saw yields edging back toward 5% as the tax bill gets closer to becoming law. He also pointed out that the US debt ceiling is set to increase around that time, which could fan more panic over government borrowing.

"That'll be an interesting period where the bond market has got to decide, 'Well, do we like the smell of this?'" Garvey told BI, speculating that an "unnerving" sell-off in bonds was possible.

"The Treasury market won't like it," he added of the current tax plan.

Peter Berezin, the chief global strategist at BCA Research, estimated there's a 30% chance the bond market could see a "nightmare scenario," where the new tax bill prompts fears of fiscal crisis and sends the 10-year US yield soaring past 6%.