Bond Market Rejects Trump's Tax Cuts, 30-Year Yield Hits 5.1%

The U.S. Treasury market has sent a clear warning signal to President Trump and Congress regarding the potential risks associated with the proposed tax cut legislation. The market's concerns center around the potential for the tax cuts to exacerbate the already growing fiscal deficit. The administration has argued that the combination of tax cuts and deregulation will stimulate economic growth, thereby offsetting the increased debt. However, financial markets have expressed skepticism about this approach.

Investors in the global largest bond market are resisting President Trump's tax cut plan. On Wednesday, as Trump administration officials met with Republican lawmakers to finalize the tax cut agreement, the benchmark 30-year U.S. Treasury yield rose to a high of 5.1%, just below the highest level in two decades, causing a decline in the stock market and the U.S. dollar. The market's concern is that this tax bill will add tens of billions of dollars to the already bloated budget deficit in the coming years, at a time when global investors' interest in U.S. assets is waning.

“There is no doubt that the bond market will also vote on the provisions of the bill,” said George Catrambone, head of fixed income and trading at DWS Americas. “It seems that the president or Congress will not actually make a significant reduction in the deficit.”

Following Moody's downgrade of the U.S. credit rating late last week, investor confidence in U.S. Treasuries has been further eroded, and sentiment worsened on Wednesday as a 20-year bond auction unexpectedly faced weak demand. This has exacerbated the bond sell-off that has been ongoing for several weeks, highlighting investors' growing disappointment with Washington's push for the bill, which is driving debt higher. The decline in the fixed-income market has also emboldened conservative Republican lawmakers who oppose Trump's tax cut plan. Before a crucial negotiation meeting scheduled for this afternoon at the White House, some of these lawmakers pointed out the bond plunge and its message on social media.

Texas Republican Chip Roy, a leading fiscal hawk, noted a post on X about a "bad bond auction." Ohio Republican Warren Davidson also mentioned a post about the rising yield.

Overall, bond investors are demanding higher returns for purchasing longer-term bonds, and not just for U.S. bonds. The yields on 30-year Japanese and British bonds also rose sharply this week. “The bond market is sending a warning signal to policymakers that fiscal sustainability issues can no longer be ignored for too long,” said Priya Misra, portfolio manager at Morgan Asset Management. “It's not just the bond market; these concerns are now dampening risk appetite and overshadowing the stock market, and the credit market is starting to take notice.”