Bond market jitters are back — and this time, it’s not just about inflation.
Long-term Treasury yields surged to kick off the week as Moody’s US credit downgrade reignited market concerns over the country’s worsening fiscal trajectory.
On Monday, the 30-year Treasury yield (^TYX) briefly broke above the closely watched 5% threshold, the highest level since 2023, before retreating to around 4.94% as the bond market ultimately shrugged off the downgrade. But the pullback didn’t last.
Yields ticked higher again Tuesday, and by Wednesday the 30-year climbed back above the closely watched 5% mark. In afternoon trading, a weak Treasury auction helped send the 30-year yield up about 10 basis points to around 5.1%. The 10-year yield (^TNX) traded near 4.6%, the highest since February.
Since bond prices move inversely to yields, rising yields indicate investors are selling bonds. This behavior runs counter to the typical flight-to-safety response during market turmoil and has fueled worries of a broader “sell America” trade.
Wall Street analysts say the volatility reflects a shift in investor sentiment as recent optimism around trade developments gives way to renewed concern over the nation’s ballooning debt.
And while markets initially shrugged off the credit downgrade, analysts caution the bond market isn’t out of the woods, pointing to rising fiscal uncertainty and stubborn inflation as key factors likely to keep long-term yields volatile in the short run.
Citi analysts said Monday that the US “fiscal space” is narrowing due to reduced tariff revenues, meaning the government has less leeway to increase spending without worsening its debt outlook. At the same time, the potential for major fiscal expenditure is growing under President Trump’s proposed “big, beautiful” tax bill.
“We have expected a narrative shift could take place from positive tariff news to negative budget/fiscal issues, which can see another round of ‘sell the US’: higher back-end yields [or long-term interest rates], lower risk assets, and lower US dollar,” Citi analyst Daniel Tobon wrote in a note to clients on Monday.
He warned that a sustained move above the 5% level on the 30-year Treasury yield could trigger a broader repricing of fiscal risk, with ripple effects for the dollar and global risk assets.
Trump’s tax proposal, still in its early stages in Congress, calls for sweeping cuts to individual and corporate tax rates, which would raise the nation’s debt ceiling by $4 trillion. Republican leaders are aiming for a vote in the House of Representatives before Memorial Day.
“The clearest way in which these [deficit and budget reconciliation] uncertainties have manifested themselves is through a steeper US Treasury yield curve,” Kelsey Berro, fixed income portfolio manager at JPMorgan Asset Management, told Yahoo Finance on Monday.
Historically, a steeper yield curve, which occurs when long-term interest rates rise faster than short-term ones, signals expectations of stronger growth or higher inflation. But as Berro noted, concerns over rising US debt and long-term borrowing costs are driving the steepening this time around.
While short-term yields like the 2-year and the 5-year have remained relatively stable, reflecting expectations that the Fed will hold interest rates steady, longer-term yields like the 10-year and 30-year have climbed more sharply as investors demand greater compensation for mounting fiscal and policy uncertainties.
This additional compensation investors demand amid such unknowns is known as the term premium.
President Trump is pushing his fellow Republicans to pass his “one, big beautiful bill,” budget legislation designed to enact his sweeping domestic policy agenda. (Chip Somodevilla/Getty Images) ·Chip Somodevilla via Getty Images
Its recent rise signals growing concern over the US’s role in the global economy and the future direction of both fiscal and monetary policy.
“Ongoing tariff uncertainty means elevated risk of a recession in the US,” BNP Paribas’ James Egelhof and Guneet Dhingra wrote. “If a recession occurred, we think that concerns about debt sustainability would mean a less robust countercyclical fiscal response than observed in prior business cycles. This would mean a longer and deeper recession, with a larger monetary policy response.”
“There’s a little bit more of a nail in the coffin in the sense that investors are looking at other options, and particularly international investors are looking at other options,” Ellen Hazen, chief market strategist and portfolio manager at F.L.Putnam Investment Management, told Yahoo Finance on Monday. “So you may see flows out of the US because of these structural reasons.”
Kathy Jones, head of fixed income at Charles Schwab, echoed this sentiment, emphasizing that while there’s no real substitute globally for US Treasurys, current policies are making it harder to attract foreign buyers.
“By attempting to reduce our trade deficit in goods and services … we’re effectively limiting capital inflows and shrinking our capital account,” she explained, arguing that this conflicts with the urgent need to finance the upcoming spending bill and other activities.
Allie Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
