U.S. Treasury yields are approaching highs, and the market is warning about Trump's tax cut plan

"Bond Market Vigilantes" are on the move! The bond market warns Trump's tax cut plan, alerting to the risks of massive deficits.

Investors are taking action against Trump's tax cut plan, as concerns grow that the proposal will add trillions of dollars to the already swollen budget deficit in the coming years. Meanwhile, reports indicate that U.S. government officials are meeting with Republican lawmakers to discuss the details of implementing the tax cut plan.

On Wednesday, the 20-year U.S. Treasury auction unexpectedly weakened, with the winning yield surpassing 5%, marking one of the worst performances in five years, intensifying market worries about rising debt.

After the auction results were released, the yield on the 30-year U.S. Treasury bond surged to 5.1%, nearing a 20-year high, while the yield on the 10-year U.S. Treasury bond also rose to 4.595%.

The stock market also took a hit, with the Dow Jones Industrial Average plummeting 817 points, and the Nasdaq and S&P 500 indices falling 1.4% and 1.6%, respectively, significantly below levels prior to last Friday's U.S. sovereign downgrade. Of the 11 sectors in the S&P 500, 10 recorded declines, indicating a broad downturn.

Meanwhile, investors flocked to safe-haven assets like gold and Bitcoin, seeking to hedge against the risks of soaring government debt and rising inflation.

Since last Friday, U.S. long-term bond yields have risen by approximately 14 basis points.

George Catrambone, Head of Fixed Income and Trading at DWS Americas, commented:

"There is no doubt that the bond market will cast its own vote on the budget proposal. This president or this Congress does not seem to genuinely intend to meaningfully reduce the deficit."

"Bond Market Vigilantes" Make a Comeback

"Bond Market Vigilantes" refer to bond market investors who protest by selling bonds and raising yields, expressing their concerns over monetary or fiscal policies that they fear could trigger inflation.

As bond yields soar, conservative Republican lawmakers have also begun to oppose Trump's tax cut plan. Texas Republican Congressman Chip Roy and Ohio Republican Warren Davidson have both emphasized the warning signals sent by rising bond yields on social mediaJP Morgan Asset Management's portfolio manager Priya Misra stated:

"The bond market is sending a warning to policymakers that the issue of fiscal sustainability can no longer be ignored for too long."

"This is not just the bond market; fear is spreading to risk sentiment, and both the stock market and credit market are paying attention."

It is noteworthy that this unease is not limited to the United States; the 30-year government bond yields in Japan and the UK also surged this week, reflecting widespread concerns among global investors about the expanding fiscal deficits of major economies.

US Debt at "Unprecedented" Levels: Interest Payments Exceed Defense Budget

The current scale of debt and deficits in the United States is growing exponentially, putting the bond market on high alert.

According to the Congressional Budget Office (CBO), the total public debt of the United States is approximately 100% of the economy. Interest payments alone are expected to be around $880 billion in 2024, exceeding the defense budget.

Even more concerning is that the balance of US Treasury debt has soared from less than $14 trillion at the end of 2016 to nearly $30 trillion, reflecting the tax cuts enacted during Trump's first term and the surge in borrowing due to the COVID-19 pandemic under both Trump and former President Biden.

According to industry organization Sifma, the annual total sales of government debt reached a record $2.6 trillion last year.

The market's violent reaction clearly indicates that investors will not tolerate endless government borrowing forever, hoping to enforce fiscal discipline through higher borrowing costs. As Tim Magnusson, Chief Investment Officer of hedge fund Garda Capital Partners, stated:

"The market will impose discipline on this matter one way or another. It is always the bond market that brings discipline."

Treasury Secretary Yellen also hinted at an awareness of the "bond market vigilante" force, stating that it is difficult to know at which "tipping point" investors will begin to "rebel."

Beware of Potential Stagflation Risks

Unlike past increases in bond yields driven by a strong economy, this rise is fueled by fears of deficits and higher inflation expectations, rather than robust economic fundamentals.

Larry Adam, Chief Investment Officer of Raymond James, pointed out succinctly:

"The reasons for the rise in yields are wrong."

Some investors have indicated that there has been a mismatch between signals from the stock market and the bond market, with stock market investors largely ignoring concerns about rising deficits and inflation.

Additionally, the market remains uneasy about inflation rising due to tariffs. There are views that concerns over tax cut plans and potential inflation are intertwined with worries about an economic slowdown, exacerbating investor anxiety.

Recently, several retailers, including Walmart, have announced plans to raise prices due to tariffs, and the second-largest discount retailer in the US, Target, stated on Wednesday that it would try to keep price increases to a minimum, but its stock still fell by 5.2%