Why the bond market is so worried about the ‘Big, Beautiful Bill’

By David Goldman, CNN

(CNN) — The decidedly unsexy bond market is usually pretty quiet. But when they want to, bond investors can send a loud, clear message to Washington. They did just that Wednesday and Thursday.

The 20-year bond auction conducted by the US Treasury on Wednesday afternoon was unusually weak: Demand for the bonds was the lowest since February, according to the Treasury Department. Investors who bought the bonds sought a higher-than-expected yield — effectively saying they wanted to be paid more for taking on the risk of lending to Uncle Sam.

That sent a big warning to President Donald Trump and congressional Republicans. The poor demand means that investors who lend money to the United States think the Trump agenda — in particular, the “Big, Beautiful” tax cut bill — 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.

Long-term Treasuries fell further Thursday; and yields, which trade in opposite direction to prices, continued to surge. The rate on the 10-year Treasury rose above 4.61%, and the 30-year eclipsed 5.14% — its highest level since October 2023.

The stock market has started to worry a bit about the news. The Dow was flat Thursday after tumbling more than 800 points Wednesday. The broader S&P 500 fell 0.1%, and the Nasdaq gained 0.1%. Wall Street’s problems could soon be felt on Main Street.

The bond market is already on edge. Bond prices have been falling in recent weeks, and yields have been rising for several reasons. Recession fears have been somewhat allayed after the Trump administration lowered tariffs on China significantly last week. Yet inflation remains a big concern as companies reporting earnings in recent days, including behemoths like Walmart, said they’ll be forced to raise prices because of tariffs.

Yields have also been rising all over the world, creating competition for US bonds. And the “Sell America” trade — in which US stocks, dollar and bonds have become less attractive — has reignited over growing debt concerns because of the tax cut bill and Friday’s US credit rating downgrade from Moody’s. That raised fears that foreign investors may not want to invest in US Treasuries in the future.

“The most troubling part of the market reaction is that the dollar is weakening at the same time,” said George Saravelos, head of FX research at Deutsche Bank, in a note to investors. “To us this is a clear signal of a foreign buyer’s strike on US assets and the associated US fiscal risks we have been warning for some time. At the core of the problem is that foreign investors are simply no longer willing to finance US twin deficits at current level of prices.”

The “yippy” bond market, as Trump previously called it, is what concerned Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick enough to convince Trump to reverse course shortly after the “Liberation Day” trade announcement on April 2, CNN reported. That’s why he temporarily rescinded his “reciprocal” tariffs on dozens of countries, some as high as 50%.

The question now: Will the bond market freak out Republicans again — enough to change the “Big, Beautiful Bill” as it moves through the Senate?

Debt hawks in the Republican party have been complaining about the Congressional Budget Office’s report that said the bill would add nearly $4 trillion to America’s $36 trillion in debt. That’s not just a number: America needs to pay interest on all that borrowing. This fiscal year alone, America has already spent $684 billion to maintain its debt, amounting to 16% of all federal spending — just on interest.

But Bessent, the steward of America’s debt and a debt hawk himself, has pooh-poohed higher rates and the Moody’s downgrade. He said Sunday on CNN that the economic benefits of the tax cuts will outweigh the debt problems it creates. And on NBC’s “Meet the Press” on Sunday he dismissed the credit rating downgrade, saying, “Who cares? Qatar doesn’t, Saudi doesn’t, UAE doesn’t,” referring to investment agreements Trump secured during his Middle East trip last week.

But the Treasury is about to fill its coffers again once Congress raises the debt ceiling, allowing the government to start borrowing again. If bond investors demand higher yields, that will make financing America’s debt significantly more expensive, putting at risk future safety net programs — one reason why Republicans are talking about big cuts to Medicaid.

Higher bond rates are also going to make life more expensive for everyday Americans. Many loans pegged to Treasury yields, such as mortgages, credit card rates and auto loans, are rising as bond yields grow. That could slow down the economy, taking some of the power out of the tax cut bill, which is expected to help juice the economy.

“Ultimately, there are only two ‘solutions’ to this problem,” said Saravelos. “Either the US has to sharply revise the current reconciliation bill currently sitting in Congress to result in credibly tighter fiscal policy; or, the non-dollar value of US debt has to decline materially until it becomes cheap enough for foreign investors to return. Brace for more volatility.”

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