The US bond market is facing challenges as President Trump’s tax bill progresses in Washington. Investors are growing concerned about the fiscal outlook and the potential for higher inflation, leading to a rise in Treasury yields. The proposed legislation aims to cut taxes without significantly reducing spending, which is expected to add more than $3 trillion to the deficit over the next decade.
This has set investors on edge, sending yields to their highest levels in months. Kathy Jones, chief fixed income strategist at Schwab, says, “We’re in the midst of a pretty big reset in policy, and therefore in markets.” Strategists believe that elevated yields could persist unless there are changes in fiscal policy. Higher yields would mean higher borrowing costs across the board, from mortgages to small business loans to credit cards.
This could potentially lead to a decline in home sales and affect other asset classes such as equities and currencies.
Investors cautious amid rising yields
Recent weeks have seen yields climbing, further fueled by a downgrade of US debt from Moody’s and a weak Treasury auction.
The yield on the 30-year Treasury topped 5% on Wednesday, while the 10-year yield closed at 4.58%—its highest level since February. Concerns about rising inflation and the potential for additional government borrowing have led bond futures markets to reduce the odds of rate cuts in 2025. Traders now see a 25% chance of the Fed’s first cut happening in July, down from 37% a month ago.
Jones explains that additional deficit spending at a time when the economy is still on solid footing is atypical and problematic. However, she does not foresee an imminent disaster, citing the US economy’s capacity to finance new debt. If the fiscal outlook remains unchanged, strategists say bond yields could keep climbing.
Jones advises investors to consider bonds with intermediate durations and to look into higher-quality investment options beyond Treasuries, such as investment-grade corporate bonds and municipal bonds that offer tax benefits.
