US government deficit brings warnings from bond market

by Michael Mackenzie, Liz Capo McCormick and Ye Xie

In the world’s biggest bond market, investors are pushing back against President Donald Trump’s tax-cut plan.

On Wednesday, they drove yields on benchmark 30-year Treasuries to as high as 5.1%, leaving them just shy of a two-decade high and sparking declines in stocks and the dollar, as administration officials met with Republican lawmakers to hammer out a deal to enact the cuts. The move stabilized on Thursday, with the yield trading at 5.09%.

The concern is that the tax bill would add trillions of dollars in coming years to already bulging budget deficits at a time when investor appetite is waning for US assets across the globe.

“Make no mistake, the bond market will have its own vote on the terms of the budget bill,” said George Catrambone, head of fixed income and trading at DWS Americas. “It doesn’t seem this president or this Congress is actually going to meaningfully reduce the deficit.” 

Investor sentiment toward Treasuries, which took a big hit after Moody’s Ratings stripped the US of its top credit grade late last week, deteriorated further following an auction of 20-year bonds on Wednesday that drew surprisingly tepid demand. 

Representative Chip Roy, a Texas Republican and a ringleader of the fiscal hawks, noted a posting on X about the “horrible bond auction.” Separately, Warren Davidson, an Ohio Republican, also highlighted a post on rising yields.

The recent rout deepened a weeks-long selloff in bonds and underscored investors’ disenchantment with the push in Washington to pile on more and more debt. The fixed-income slide also emboldened conservative Republican lawmakers who oppose Trump’s tax-cut plan with some taking to social media to point out the bond slump and the message it was sending.

“We underscore the need to be cautious when it comes to US duration,” Benoit Anne, senior managing director for Strategy and Insights Group of MFS Investment Management wrote in a note this week. “The recent US sovereign rating downgrade announcement is likely to reinforce the upside risks to US rates, through the need to acknowledge that the US now warrants a higher risk premium.”

Growing deficits grows default risk. https://t.co/AtgZ7NcmhH

— Warren Davidson 🇺🇸 (@WarrenDavidson) May 21, 2025

On Wednesday night, House Republican leaders released a new version the bill with a higher limit on the deduction for state and local taxes and other changes in a bid to win over warring GOP factions to support the legislation. Treasuries were little changed in Asia trading on Thursday.

Overall, bond investors are demanding more compensation to buy longer maturities — and not just for the US. Japanese and UK 30-year yields also have risen sharply this week.

“The bond market is giving a warning sign to policymakers that fiscal sustainability issues cannot be ignored for too much longer,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “It is not just the bond market, but now those fears are gripping risk sentiment and equities, and credit are also paying attention.”

Vigilantes Stir

The stirring of the so-called bond vigilantes marks a moment when enough investors decide that only by imposing higher borrowing costs will governments finally bow to the pressure and cut spending. It’s a process that last played out in the US during the early stages of the Clinton administration in 1993 and in Europe after the financial crisis.

“The market’s gonna bring discipline to this thing one way or the other,” said Tim Magnusson, the chief investment officer at $11.5 billion hedge fund Garda Capital Partners. “Until you tackle entitlement reform — social security, Medicare, Medicaid — they are not going to move the needle. That’s the only way. It’s always the bond market that brings the discipline.”

While current US yields between 4% and 5% are near levels that prevailed before 2007 and the financial crisis — and the US historically has paid far higher rates at times — debt and deficits now are exponentially bigger, and that makes all the difference.

A look at the fiscal red ink reinforces why the bond market is on edge. The ratio of total US public debt to the size of the economy is around 100%, according to the Congressional Budget Office. Interest payments alone were about $880 billion in 2024, CBO data show, exceeding the defense budget.

The amount of outstanding Treasuries has skyrocketed to nearly $30 trillion from less than $14 trillion at the end of 2016, a reflection of tax cuts passed during Trump’s first term and then an explosion in borrowing during Covid, under both Trump and former President Joe Biden. Annual gross sales of government debt hit a record $2.6 trillion last year, according to Sifma, the bond market’s trade group. 

“The administration appears to be making a pretty pretty adventurous or risky bet that growth is going to bail the debt and deficit trajectory out,” said Bill Campbell, a portfolio manager at DoubleLine. “But you are running the risk that if it doesn’t, you’ve now increased the trajectory of fiscal deterioration. You’re running the risk that you’re going to potentially make that trajectory even more difficult to address going forward.”

The intensifying investor concern looms as a challenge for the US, which has taken full advantage of the dollar’s status as the world’s primary reserve currency through the decades. It also reinforces the worst-case scenario painted by Treasury Secretary Scott Bessent, who this month told US lawmakers that the nation’s debt path is unsustainable. 

He also indicated an awareness of the power of the bond vigilantes, adding it’s “very difficult to know” the tipping point at which investors would “rebel.” 

What Bloomberg strategists say...

“With trio of auctions signaling less and less confidence from global investors in holding longer-dated durations, the path of least resistance is for higher yields, even if the move seems overdone.”

— Alyce Andres, US Rates/FX Strategist, Chicago

“Bond investors are pricing in now a higher risk of fiscal deterioration,” said John Velis, a macro strategist at BNY in New York. “They are saying we don’t like what’s going on and we are not going to buy the bonds.”

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