The bond market is shaking Wall Street again, this time because of worries about tax cuts

The Hill

22-05-2025

NEW YORK (AP) — Wall Street's quiet corner is making noise again.
While the bond market is typically seen as slower moving, it can pack a heavy punch when it's alarmed. And right now, it's getting worried about how much more Washington is preparing to pile onto its spiraling mountain of debt because of its desire to cut taxes.
The House of Representatives approved a bill of tax breaks early Thursday that could add trillions of dollars to the federal government's debt, and it's heading to the Senate next. Worries about the U.S. debt have sent yields jumping in the bond market, which in turn has shaken the stock market. The S&P 500 is potentially heading toward its worst week in seven.
In the past, angry reactions from the bond market have been so strong that they've forced governments to backtrack on policies and even led to the ouster of some political leaders. To be sure, many veteran investors say it would be overblown or at least premature to say 'bond-market vigilantes' are rounding up this time around, because yields have not jumped high enough to indicate a crisis. But the higher yields will nevertheless have wide-reaching effects.
'I wouldn't look at this from an apocalyptical dynamic, but there are real ramifications,' said Nate Thooft, a senior portfolio manager at Manulife Investment Management. 'Look at mortgage rates.'
Here's a look at what's going on:
The centerpiece of the U.S. bond market is the 10-year Treasury, and its yield has climbed to 4.54% from 4.43% at the end of last week and just 4.01% early last month. That's a notable move for the bond market, which measures things in hundredths of percentage points.
That yield shows roughly how much in interest the U.S. government needs to pay investors to get them to lend it cash for 10 years. Washington needs that cash because it consistently spends more than it takes in through tax revenue. And when bond investors are more wary of lending to the U.S. government, yields for Treasurys rise.
The moves have been sharpest for the longest-term bonds. The yield on a 30-year Treasury has topped 5% and is getting close to where it was before the 2008 financial crisis wiped out interest rates.
Bond investors hate inflation because it means the future payments that bonds will give them won't be able to buy as much stuff.
Worries are rising about the potential for higher inflation for a couple reasons. On one hand are President Donald Trump's tariffs, which could push up prices for all kinds of products. A bigger, more long-term concern is how much debt the U.S. government is building up.
Those debt concerns gained momentum at the end of last week after Moody's Ratings became the last of the three major rating agencies to say the U.S. government no longer deserves a top-tier credit rating because of its troubles keeping its debt in check. The worries then built through this week as the House moved forward on its tax-cut bill that it approved early Thursday.
Other factors have also been pushing yields up recently, including increasing hopes that the U.S. economy will not fall into a recession after Trump delayed many of his stiff tariffs, particularly against China.
In the past, the bond market has recoiled at policies that it's found distasteful. Sometimes, the reaction is violent enough to scare politicians.
Trump himself said that the bond market may have played a role in his decision earlier this year to delay many of his tariffs, saying that he noticed investors 'were getting a little queasy.'
The bond market also helped make Liz Truss the United Kingdom's shortest-serving prime minister in 2022, when it revolted against her plan to cut taxes and raise spending without a way to pay for them. James Carville, adviser to former U.S. President Bill Clinton, also famously said he'd like to be reincarnated as the bond market because of how much power it wields.
While there is some element of vigilantism that's keeping Treasury yields higher than they would be otherwise, the reaction so far by the bond market likely isn't enough to get Trump or Congress to back off their efforts to cut taxes.
'I don't really expect it to snowball or last,' said Brian Rehling, head of global fixed income strategy at Wells Fargo Investment Institute. 'I don't think this is going to rise to a level of a crisis.'
Treasury yields calmed on Thursday, for example. And the United States isn't the only country seeing yields for its bonds rise. That's happening for other developed economies around the world, particularly Japan.
Plus, all of the issues about the U.S. government's debt are well known, and critics have been warning for years that it's heading on an unsustainable path. It still might be years before the U.S. government's rising debt load triggers a panic button in financial markets, Rehling said.
When Treasury yields rise, it means more of taxpayers' dollars are going just to repay the national debt rather than to keep the government running.
Higher yields can also filter into the rest of the economy and make it tougher for U.S. households and businesses to get their own loans. Mortgage rates track 10-year Treasury yields, for example, and the average rate on a 30-year mortgage just hit its highest level since mid-February.
Higher Treasury yields can also translate into higher rates for everything from credit cards to auto loans. That means a sharp enough rise can put the brakes on the U.S. economy by discouraging businesses and households from borrowing and spending, raising the risk of a recession.
High yields can also discourage investors from paying high prices for stocks and other investments.
All of that, of course, seems to be getting only more difficult to predict. 'We don't know how things are going to all develop,' Rehling said, pointing to how 'things seem to change by the day with Washington.'