Every day, I spend at least two hours reading updates from my partners and other sources. I was not surprised to see uncertainty once again dominating the US bond market, as highlighted in one of my partners’ latest commentaries.
Nobody is exactly calling for fireworks, but in this market, even a modest data surprise, up or down could light the fuse and send Fed policy expectations scrambling. Then there is the Trump factor, which continues to stir short-term sentiment like a wildcard guest at a dinner party.
I know you are likely tired of hearing about personalized opinions on tariffs. When it comes to tariffs, let me just say take every statement with a grain of salt. We have seen how quickly things can turn sometimes before the tweet even finishes loading.
Here is a section:
Bond vigilantes return US government bonds (treasuries) fell in price as investors required higher yields. A 20-year auction (government sale of bonds to investors) saw weak support and a bump up in yields, adding to US borrowing costs.
The rapid expansion of US government debt, which has accelerated in recent years, has started to cause ructions in the bond markets. US President Donald Trump’s administration has helped craft a tax and spending bill that is currently under negotiation in Congress. The bill narrowly passed the House of Representatives by a vote of 215 to 214 and is widely expected to increase the federal budget deficit.
It still has to pass the Senate, which may require more changes, to become law. As it stands, the deficit increase is largely mitigated by tariff income, but this is controversial because tariff income doesn’t reflect current legislation. Instead, it stems from executive emergency powers with an implication that it should be temporary in nature (although seems likely to remain in place).
Ultimately, Congress can convince itself that tax cuts can pay for themselves through higher growth, but the bond market is more objective. More issuances seem to be driving the increase in bond yields.
Bond vigilantism occurs when the bond market sells off and borrowing costs rise in response to the government seeming to want to pursue unsustainable policies. It ended Liz Truss’s premiership in the UK, and it may have prompted President Trump to reverse course on his “Liberation Day” tariffs.