The market has a big opportunity to tell Trump what it thinks about his big tax bill

Business Insider

2 days ago

US Treasury auctions happen all the time, and they're usually unremarkable for markets. But this week's offering of 30-year government bonds will take on heightened importance.
That's because it could represent an important test of what investors think about Donald Trump's so-called "Big Beautiful" tax bill. Yields on government bonds have risen in recent weeks as bond traders have dumped the fixed-income securities.
The logic of their trading activity is straightforward: Amid concerns that the tax bill will further inflate a sizable federal deficit — and with so much uncertainty swirling around Trump policies overall — the appeal of holding long-dated government debt has taken a hit.
The slate of bond auctions scheduled for this week is heavy, with $58 billion of three-year notes to be sold on Tuesday and $59 billion of 10-year bonds up for auction on Wednesday.
But amid the deluge of supply, investors will likely be watching the $22 billion sale of 30-year debt the closest.
The auction happens at a time when the safety and soundness of long-dated government bonds are being scrutinized more than ever, and not just in the US. Governments around the world have seen their debt costs spiral higher this year as bond investors question the wisdom of lending to countries running huge deficits and fueling their spending sprees with more and more debt.
In the US, the concern is that the federal government — already running a steep budget deficit — is laying the groundwork for more issues down the road if lawmakers pass the Republicans' sweeping spending and tax bill. The Congressional Budget Office estimated last week that the spending bill would add $2.4 trillion to the deficit over a decade.
Economists and analysts say the worry is that high deficits and heavy borrowing could lead to higher inflation, less growth, and fiscal instability — and it's got the so-called bond vigilantes on high alert already.
The 30-year Treasury yield was about 4.95% on Monday, having edged down in recent weeks after touching 5.1% last month, which was the highest level since 2008.
A possible sweet spot for yields
Scott Buchta, the head of fixed income strategy at Brean Capital, told Business Insider that 5% could be a sweet spot for the coming auction, drawing in long-duration investors that might be monitoring the deficit developments with unease.
"It's going to be interesting. It'll depend on where the 30-year is trading going into the auction," Buchta said. "My gut is that there will be more demand at 5% than in the mid-to-high 4s."
While the deficit is definitely on the radar, Buchta said that future auctions of 30-year bonds could be even more important because the market will have more clarity on the state of the tax bill.
Markets already got a taste of what could happen this week back in May, when a weak 20-year bond auction in the early days of the debate over the tax bill sent stocks tumbling and fueled concerns of a buyers' strike in longer-dated US bonds.
The concern among investors is that sputtering demand for long-dated Treasurys could reignite the "sell America" narrative that's waxed and waned in 2025 amid fears over tariffs, inflation, and, now, the deficit.
"Any sign of diminished investor appetite could be interpreted as a reason to reallocate assets away from the US — while healthy demand might see the dollar gain as fears of a buyer's strike abate and the "de-dollarisation" theme loses some of its impetus," Karl Schamotta, chief market strategist at Corpay, wrote on Monday.
This week's bond auctions are also big events for the stock market. Rising yields are a headwind for stock prices, and long-dated bond yields at or above 5% have tanked stocks in recent years.
"The line in the sand is probably around 5% on the 30-year, and above that, you might see investors get more concerned, especially since the market has rallied so much recently," Paul Hickey, the co-founder of Bespoke Investment Management, told BI.
With stocks hovering close to record highs, it might not take much to spark a pullback. If bond investors balk at this week's auctions over fears about the tax bill, expect the sense of complacency that's settled over markets to be quickly dispelled.
Bond auctions could shake markets out of this sense of relative calm," Corpay's Schamotta said. "Long-dated bond yields have been rising for months, with growing inflation worries, fiscal deficit fears, concerns about weakening demand from foreign real-money investors, and political uncertainty combining to widen risk premia across the curve."