Wall Street braces for more bond market turmoil as Trump tax bill stirs up deficit concerns

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Wall Street braces for more bond market turmoil as Trump tax bill stirs up deficit concerns

The bond market is once again flashing warning signs.

Long-term Treasury yields surged this week as investors grew increasingly uneasy about the ballooning US deficit and the fiscal

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tied to President Trump’s proposed tax legislation.

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.

“Clearly, the market is very focused on two key things: the tariff news and this policy framework of debt and deficits with interest rates,” WisdomTree Global chief investment officer Jeremy Schwartz told Yahoo Finance on Thursday. “If interest rates blow out because there’s fear about the deficit [and] we don’t actually bring down spending … that’s one of the [key] downside risks.”

While ballooning deficits

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, the latest wave of investor unease reflects a collision of both new and familiar threats, with fiscal fears, stubborn inflation, and political uncertainty top of mind. At the center of it all is Trump’s newly advanced tax bill, which cleared the House this week and is now headed to the Senate.

“We have an unsustainable fiscal situation that is leading to very challenging dynamics in the bond markets where we are having to pay higher interest rates to service our debts,” Shai Akabas, director of economic policy at the Bipartisan Policy Center, told Yahoo Finance on Friday.

“That ultimately is leading to higher interest rates across the economy and feeding the inflation that we’ve seen in past years, and that we might continue to see from the tariff dynamic that’s going on.”

The legislation proposes sweeping cuts to individual and corporate tax rates and is projected to add

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to the national debt over the next decade. Despite its scale, the bill lacks swift and substantial spending cuts, fueling investor anxiety over the US’s

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“The House bill is probably the floor for what deficits look like,” Deutsche Bank senior US economist Brett Ryan said. “The Senate is going to have its say, and that’s probably going to mean even less in terms of spending cuts.”

Ryan noted that while the bill claims over $1 trillion in savings, most of that is backloaded beyond the current presidential term. “Will it ever happen?” he asked, casting doubt on whether the proposed fiscal tightening will materialize.

Read more: What are bonds, and how do you invest in them?

Story Continues

The bond market’s reaction to the legislation has been swift. The 30-year Treasury yield (^TYX) surged as high as 5.15% this week, marking its biggest intraday move since 2023 and approaching closing levels not seen since 2007.

These moves were driven not only by renewed fiscal concerns at home but also by

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and escalating fiscal turmoil in Japan. Prime Minister Shigeru Ishiba’s warning on the country’s finances triggered a bond sell-off and stoked global fears about waning demand for US Treasurys.

“The long end of the curve, there’s a tremendous amount of uncertainty,” Asterozoa Capital chief investment officer Joe Hegener said on Friday, describing recent market moves as a “material risk” to stocks and the broader US economy.

“We’re starting to see investors get a little spooked,” he continued. “What’s going on in Japan and abroad is only exacerbating that risk.”

While short-term yields have stayed relatively anchored amid expectations that the Fed will hold interest rates steady, longer-term yields have climbed more sharply as investors demand greater compensation for mounting fiscal and policy uncertainties.

Heather Boushey, who served on President Joe Biden’s Council of Economic Advisors, said the recent surge in yields may signal mounting fears of stagflation and deeper economic strain.

“There is not good news here,” she said, adding that the bond market’s message is clear: “Let’s not go down this path.”

Bond investors have grown increasingly uneasy about the ballooning US deficit and the fiscal

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tied to President Trump’s proposed tax bill. (Win McNamee/Getty Images) · Win McNamee via Getty Images

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