After "dying to show Trump" in April, is the market about to play it again?

The U.S. market is unstable; just as the tariff crisis has calmed, a debt storm has arisen. The market is trying to figure out where the trigger threshold for the "Trump put" lies.

On May 21, Nick Timiraos, a reporter for The Wall Street Journal, known as the "new Federal Reserve correspondent," published an article stating that the U.S. economy has just stepped back from the brink of a large-scale tariff increase crisis, and now faces a second wave of impact: the potential effects of rising government borrowing costs are becoming increasingly apparent.

Recently, after Moody's downgraded the U.S. AAA credit rating and the House Republicans pushed through key obstacles for Trump's tax bill, U.S. Treasuries faced a sell-off, and yields quickly surged.

The sell-off of long-term government bonds was particularly evident on Wednesday. The yield on 30-year Treasuries reached 5.089%, the highest level since October 2023, and the auction performance of 20-year Treasuries was poor. The yield on 10-year Treasuries rose to 4.595%, the highest point since February of this year.

Peter Berezin, Chief Global Strategist at BCA Research, warned: "Just like last month's tariff issue, we are about to find out what levels bond yields and the S&P 500 index need to reach for Trump and Congress to correct this completely unsustainable fiscal policy."

Expanding Deficits and Rising Borrowing Costs

The Congressional Budget Office (CBO) predicts that the Republican tax bill will push the deficit to about 7% of GDP in the coming years, an unprecedented borrowing level for an economy with low unemployment in peacetime.

The CBO estimates that the bill could provide about $280 billion in economic stimulus next year, accounting for approximately 0.9% of GDP, primarily from tax cuts. This will largely offset the impact that increased import tariffs may bring.

However, the market is more concerned about the expanding deficit and rising borrowing costs.

Timiraos's article points out that as U.S. Treasury yields rise, the government must pay more to cover the interest on nearly $29 trillion in debt, which means that Americans may face higher taxes or cuts in government services in the future. This situation is akin to a heavily indebted household that has to allocate more income to debt repayment rather than improving quality of life.

A high-interest-rate environment not only affects government finances but also directly impacts the lives of ordinary citizens. Previously, Treasury Secretary Yellen emphasized the importance of keeping the 10-year Treasury yield down, as many businesses and consumers' borrowing costs are linked to long-term yields. When government borrowing costs rise, the financing costs for large purchases such as homes or cars also increase, further suppressing economic vitality.

Will Trump Bow to the Market Again?

The likelihood is low.

The Republican Party in Congress and the White House claim that the CBO's data exaggerates the deficit because it does not consider how tariffs and deregulation will enhance revenue and economic activity. They argue that the resulting stronger growth will exceed any revenue losses caused by lower tax rates, meaning there will be no net increase in borrowing Timiraos' article cites Krishna Guha of Evercore ISI stating: "We understand that there will be no substantial fiscal tightening. For the foreseeable future, the U.S. will continue to maintain a massive deficit... The next economic downturn or emergency will see even larger deficits."

Andy Laperriere, head of U.S. policy research at Piper Sandler, noted that he frequently receives inquiries from clients about whether Congress will change its plans if the 10-year Treasury yield reaches and stays around 5%. "It's not possible," he stated in a report this week.

The Trump administration had promised to address the deficit issue through the Department of Government Efficiency (DOGE) led by Musk. Officials once indicated that trillions of dollars in spending cuts could provide American taxpayers with thousands of dollars in refunds. But now they have scaled back those ambitions.

Laperriere pointed out: "Trump has no intention of touching social welfare programs, and despite the current deficit situation being clearly worse, Republicans in Congress are less concerned about the fiscal deficit than they were a decade ago."