The bond market is missing the real ‘big, beautiful' story

The Hill

28-05-2025

After touching 4 percent on Apr. 2, the yield on the 10-year Treasury has climbed more than 50 basis points. Pundits and portfolio managers alike insist the bond market vigilantes are delivering a decisive and unmistakable rebuke of President Trump's One Big Beautiful Bill Act and its tax cuts — just passed in the House and now pending in the Senate.
On the surface, they appear to have a case. The Congressional Budget Office projects that the Big Beautiful Bill Act will add almost $4 trillion to the national debt over the next ten years.
To the CBO, tax cuts mean less revenue. Less revenue in the absence of equal spending cuts means more borrowing. More borrowing means higher bond yields, a bigger interest payment burden on future generations, and a fiscal drag on GDP growth.
Go a bit deeper, however, and it is clear that financial markets do not have complete information about either the historical inaccuracy of CBO forecasts or the substantial positive revenue impact of the new Trump tariffs.
For years, a feckless CBO, saddled by archaic Keynesian and static assumptions, has routinely underestimated the dynamic revenue effects of pro-growth tax policies, deregulatory momentum, lower energy prices, and trade deficit-reducing fair-trade policies. Exhibit A is the Trump 2017 Tax Cuts and Jobs Act.
When Congress enacted this historic legislation, the CBO projected only modest improvements in GDP growth, estimating a return to trend growth around 1.8 percent to 2.0 percent. Yet actual growth in 2018 jumped to 2.9 percent, exceeding CBO forecasts by nearly a full percentage point.
What the CBO forecast missed was a surge in business investment, the repatriation of overseas earnings, and a sharp increase in consumer and small business confidence that followed both the tax cuts and sweeping regulatory reforms. This miscalculation led to persistent underestimates of tax revenue, employment gains, and productivity improvements during the early Trump years. This demonstrates a systemic blind spot in CBO modeling whenever policies deviate from the Keynesian static status quo norm.
The CBO's latest score of Trump's One Big Beautiful Bill Act is even worse. It pessimistically assumes a long-term, low-ball GDP growth rate of a mere 1.7 percent. This falls well short of what America's economy is capable of under Trump policies that promote a lower tax and regulatory burden, strategic energy dominance, and trade deficit-reducing trade policies.
The result of the CBO's low-ball GDP growth forecast is a projected increase in the federal debt over the next ten years of a whopping $3.8 trillion. If, however, we more realistically add a half or full point more to the projected growth rate, these more dynamic growth rates of 2.2 percent to 2.7 percent add between $1.2 trillion and $2.5 trillion in new tax revenues. In this scenario, the CBO's projected revenue shortfall drops from $3.8 trillion to $2.6 trillion under the 2.2 percent growth rate assumption and $1.3 trillion under the 2.7 percent growth rate assumption.
That's still real money of course, but here's the buried lead. In making its projections, the CBO has refused to account for — or 'score' as they say in CBO lingo — any of the new revenues from the Trump reciprocal tariffs.
Remember here a key goal of Trump's fair-trade policies is to shift the U.S. tax base from one primarily reliant on income taxes to one that, with the vision of the new External Revenue Service, is also supported by tariff revenues. Consider, then, the impacts on the CBO's projected revenue shortfall of just the modest 10 percent global baseline tariff Trump recently put into effect.
Such a tariff, depending on consumer responses (as measured by demand elasticities) and enforcement efficacy (i.e., how much cheating occurs), should generate between $2.3 trillion and $3.3 trillion in additional revenue over the ten-year forecast period. When this revenue is layered onto the enhanced dynamic growth scenario, the projected budget impact from the One Big Beautiful Bill Act ranges from a modest $300 billion increase in the debt under the 2.2 percent growth assumption to as much as a $2 trillion surplus under the 2.7 percent growth assumption.
As this forecast recognizes, as tariffs take hold and U.S. companies shift away from foreign suppliers, the volume of dutiable imports will decline — and with it tariff revenues. But this is not a flaw in the strategy or forecast; it is its greatest strength. Every dollar that no longer flows overseas will instead fuel domestic production, payrolls, and investment. That shift expands the tax base far beyond the narrow confines of tariff collections.
As American factories hum, workers earn paychecks and spend them, generating higher income, payroll, and sales tax revenues. Domestic firms post profits and pay corporate taxes, while reinvesting in equipment, technology, and job creation. In this way, the new Trump tariffs catalyze a multiplier effect that produces not only self-financing fiscal policy, but also a broader industrial renaissance.
It is a virtuous cycle that the Congressional Budget Office simply refuses to score — but one that any business owner, worker, or supply chain strategist can see plain as day. Which brings us back to the bond market.
The current rise in yields reflects fear — not facts. Bond traders are pricing in a future where the government borrows trillions more with no offsetting revenues. They believe the tax cuts are not paid for.
To the contrary, Trumpnomics and the Trump tariffs will put America on a sounder fiscal footing than any policy proposal in decades. That's the complete information our financial markets should be working from – and bond investors should yield to that wisdom.
Peter Navarro is the White House Senior Counselor for Trade and Manufacturing.