Treasury bond yields are surging as the Trump tax bill progresses. Here's why it matters.
President Donald Trump has called his signature tax legislation a “big, beautiful bill.”
Bond investors would beg to differ.
The $28 trillion market for U.S. Treasurys has had an uneasy several days as the tax bill made its way through Congress. The 30-year bond has gained roughly 11 basis points since May 19, touching the highest level since 2023.
Bond yields rise when prices fall, and vice versa – and that’s why the bond market’s opinion on government policy matters. If investors are less interested in the debt issued by the U.S. government, they will force the government to entice them with a higher interest rate. If the government is paying more for its debt, it has less money to pay for services that make it a good place to live – and a vicious cycle may result.
(The bill) “looks like a budget buster in the near term when it comes to spending,” said Christopher Rupkey, chief economist for FWDBONDS, a market research company. “Bond yields are rising, anticipating there will be more Treasury auctions to fund the budget deficit red ink.”
Inflation erodes the value of bonds
It’s not just the rising deficit that has investors spooked.
The tax bill is just one of many Washington policies that are expected to increase inflation, said Steve Blitz, chief U.S. economist at GlobalData, in an interview. In the short term, tariffs will add to the cost of consumer goods. Over the longer term, the White House’s stated goal of bringing manufacturing jobs back to the United States will make them more expensive to produce.
When inflation is rising, the fixed income payments that bonds give off become less valuable.
Against that backdrop, and with the recent Moody’s downgrade of the United States’ credit rating, “I would think investors might be a little gun-shy,” Rupkey told Paste BN. “This doesn’t look good. Certainly, the outlook isn’t a good one. This is something we haven’t seen in a while.”
Downstream effects of federal policies
As the federal government’s finances deteriorate, it has a ripple effect throughout the national economy. For one thing, state and local governments' borrowing power is directly linked to that of the "sovereign," the United States.
“Market participants should consider the possibility that the historical treatment of the federal government in municipal ratings/credit assessments may be shifting,” wrote Municipal Market Analytics partners in a May 19 research note. “Moody’s recent downgrade of the state of Maryland’s Aaa rating is (in our opinion) early evidence that the federal government’s weakening credit position is becoming a more pressing factor in municipal rating outcomes.”
That means higher borrowing costs for things like infrastructure upgrades, school buildings, transportation systems, utilities, and other expenses borne by local governments and felt directly by their taxpayers.
Bond yields also set the direction for some consumer spending: mortgage rates follow the 10-year U.S. Treasury note, for example.
On May 22, reporters asked Russ Vought, director of the White House Office of Management and Budget, if he was concerned about declines in the bond market.
Vought said the debate over the last week had been largely over the cost of the bill without more explanation about the $2 trillion in projected savings and economic growth. “I think once that conversation gets made and once we continue to educate folks on that, I think people will settle down,” he said.
Bond vigilantes?
In fixed income markets, one of the biggest specters is that of “bond vigilantes:” investors who force policy changes by selling – or threatening to sell – a government’s debt. That’s one reason why a spike in bond yields can rattle the stock market, like it did in April after the White House’s tariff rollout.
On May 21, when the U.S. Treasury prepared to sell $16 billion of 20-year bonds, investors demanded a much higher premium – over 5%, compared to the 4.6% that had been the norm in previous auctions.
But some analysts say the recent market jitters are overblown. In a May 22 research note, Nicholas Colas, co-founder of DataTrek Research, wrote that “10-Year Treasury yields are basically unchanged on the year (up 2 basis points), while Japanese JGB’s are up 45 bps in yield, German bunds are + 29 bps, and every other country listed has seen its long-term sovereign debt payouts rise by at least 12 basis points thus far in 2025. Takeaway: Higher risk-free rates are a global, not just U.S., phenomenon.”
And both Rupkey and Blitz acknowledge that the tax legislation – not to mention the combined effects of all the new policies from the White House – is so big and sprawling that the consequences are impossible to predict.
Still, one reality remains: “The fundamental imbalance of outlays and revenue remains because the United States refuses to tax itself enough to pay for what it has promised and/or refuses to break the promises it has made,” Blitz wrote in a May 21 research note.
This story has been updated with new information.
Contributing: Bart Jansen