The Dow Jones Industrial Average plunged 800 points on Wednesday as concerns mounted about the premier status of American assets. Stocks, bonds, and the dollar all fell sharply after a disappointing auction for 20-year Treasury notes that saw weak demand and settled with a yield above 5%. The weak demand for US Treasuries comes amid growing anxiety on Wall Street about the potential for President Donald Trump’s tax bill to add to the deficit and put pressure on the federal debt burden.
Treasury yields have pushed higher in recent days following Moody’s announcement on Friday, which downgraded the United States’ sovereign credit rating. “Although Moody’s decision to downgrade the US’s sovereign credit rating on Friday from Aaa to Aa1 was unsurprising, it does add focus to the real issues at hand: the US’s growing deficit and debt burden,” said Chip Hughey, managing director for fixed income at Truist Advisory Services. The ratio of federal debt to gross domestic product was 123% in 2024, up from 104% in 2017, according to the Treasury Department.
Alan Auerbach, a professor of economics at UC Berkeley, noted, “We’re now talking about deficits and a national debt-to-GDP ratio that are really going to be unprecedented, except for recent recessionary times.”
The S&P 500 snapped a six-day winning streak on Tuesday, and Wall Street’s fear gauge, the CBOE Volatility Index, surged more than 15%. The US dollar index slid 0.5%, while Bitcoin surged to an all-time record high above $109,400 before paring gains. Trump’s latest showdown with Wall Street has rattled global financial markets, with plans to hit the EU with 50% tariffs on all imports adding to investor headaches.
Wall Street rattled by deficit concerns
The yield on 30-year US government bonds has risen above 5%, threatening to reach the highest level in 18 years. Central to the concern is the US’s “twin deficit” position – running a simultaneous budget deficit and trade deficit – and the worry that Trump’s policies will stoke inflation and sink the US economy into recession.
Mark Dowding, the chief investment officer at RBC BlueBay Asset Management, said the president seemed content to “keep calm and carry on” despite growing investor unease. Trump’s tax cuts and spending measures could add a further $3.3tn to America’s outstanding debt pile by 2034, taking the debt-to-GDP ratio to 125%. While there are gyrations in the bond market, there are also consequences for the world at large, as the US bond market acts as a critical reference point for other securities around the globe.
The decidedly unsexy bond market sent a loud, clear message to Washington this week, with the poor demand for 20-year bonds indicating that investors think the Trump agenda has made America an unacceptably risky investment. They are not going to keep funding the government’s coffers unless they get paid more for it. The bond market concerns were significant enough to convince Trump to temporarily rescind his “reciprocal” tariffs on dozens of countries.
The question now is whether the bond market freak out will be enough to change the “Big, Beautiful Bill” as it moves through the Senate.
