Concerns over Trump's tax bill causing chaos in bond market, potential spike in yields
From Yahoo Finance: 2025-05-17 12:15:00
President-elect Donald Trump’s 2017 tax package set to expire in 2025 could spark chaos in the bond market due to concerns about the deficit. The tax bill aims to extend Trump’s 2017 tax cuts, potentially adding $4 trillion to the US deficit over the next decade, according to the Tax Foundation. Despite opposition from within the Republican party, a tax bill is likely to get done this year. Bond investors are worried about the impact on government spending and the safe-haven status of US Treasurys.
Market pros predict that bond investors may throw a tantrum over the tax bill, leading to policy-fueled volatility in the coming months. As details of the tax bill get ironed out, the yield on the 10-year US Treasury could spike as high as 5%. The bond market is closely watching how the situation unfolds, with concerns about a potential sell-off in government bonds if the tax bill moves forward in its current form. The US debt ceiling is also set to increase around that time, adding to worries about government borrowing.
Bond vigilantes, a term coined by Ed Yardeni, refer to the bond market’s reaction to policies that could make US Treasurys less safe. Bond investors are currently concerned about high levels of government borrowing and inflation, which could impact the US deficit and interest rates. Trump’s team is keeping an eye on the 10-year US Treasury yield as a reflection of long-term interest rates in the economy.
Trump has suggested that he wants to lower interest rates for Americans during his term and is monitoring the 10-year Treasury yield as a scorecard. Bond yields have been on a roller coaster this year already, climbing in response to tariffs and policy announcements. The administration may need to make politically strategic decisions to avoid a dramatic confrontation with bond market vigilantes and ensure smooth bond auctions.
Read more: How a new tax bill could cause bond yields to spike and stoke a fresh bout of market chaos