"Bond Vigilantes" are back! Trump's tax cuts impact long-term US bonds, yields approaching a 20-year high.

In the world's largest bond market, investors are resisting President Donald Trump's tax cut plan. On Wednesday, as US government officials met with Republican lawmakers to finalize an agreement on implementing tax cuts, the benchmark 30-year US Treasury bond yield briefly rose to a high of 5.1%, just steps away from a 20-year high, triggering a drop in the US stock market and the US dollar. Concern is growing that this tax bill will add tens of trillions of dollars to an already ballooning budget deficit over the next few years as global investors lose interest in US assets. "There's no question that the bond market will be voting on the terms of the budget bill," said George Catrambone, Head of Fixed Income and Trading at DWS Americas. "It looks like this president or this Congress is actually not going to significantly reduce the deficit." Last week, Moody's downgraded the US's credit rating, shaking investor confidence in US Treasury bonds. Unexpectedly weak demand for 20-year US Treasury bonds at auction on Wednesday further deteriorated investor confidence in US Treasury bonds. The US 30-year Treasury bond yield surpassing 5% nears a peak in 2023 This sharp drop deepened weeks of continued bond selling, highlighting investor disappointment in the US government's increasing debt measures. On Wednesday evening, the House Republican leaders unveiled a new version of the tax plan that raises the deduction amounts for state and local taxes and makes other modifications to win support from various factions within the Republican Party. US Treasury bond prices were mostly flat during Asian trading on Thursday. Overall, bond investors are seeking higher returns when purchasing longer-term bonds not just US bonds. This week, the yields on Japanese and British 30-year government bonds also rose significantly. Priya Misra, portfolio manager at JPMorgan Asset Management, said, "The bond market is sending a warning signal to policymakers that fiscal sustainability issues cannot be ignored for too long. This isn't just a bond market issue; these concerns are now affecting risk sentiment and the stock market, as credit markets are also paying attention." The Return of the "Bond Vigilantes" The return of the "bond vigilantes" signifies that enough investors believe that only by raising borrowing costs can the government ultimately yield to pressure and cut spending. This phenomenon has occurred in the US at the beginning of the Clinton administration in 1993 and in Europe after the financial crisis. The so-called "bond vigilantes" are investors or market participants who sell government bonds to resist fiscal and monetary policies. While US Treasury yields are currently between 4% and 5%, nearing levels before 2007 and the financial crisis, and at times in US history interests paid were much higher, the exponential growth of debt and deficits make the situation different now. The massive fiscal deficit is causing unease in the bond market. According to data from the US Congressional Budget Office, the US public debt-to-GDP ratio is around 100%. By 2024, interest payments alone will reach $880 billion, surpassing the defense budget. Due to tax cuts passed during Trump's first term and the surge in borrowing during the COVID-19 pandemic, the outstanding US national debt has soared from less than $14 trillion at the end of 2016 to nearly $30 trillion. According to Sifma, a bond market trading organization, the US government bond issuance reached a record $2.6 trillion last year. Bill Campbell, portfolio manager at DoubleLine, said, "The US government seems to be making a rather risky bet, believing that economic growth can reverse the trajectory of debt and deficits. But if economic growth fails to turn things around, the fiscal trajectory will deteriorate rapidly." The bond market trend is also pressuring the US government. US Treasury Secretary Scott Benett told lawmakers this month that the US debt trajectory is unsustainable. He acknowledged the power of the bond vigilantes and added, "It's hard to know" the tipping point at which investors will resist. John Velis, macro strategist at BNY Mellon, said, "Bond investors are now digesting the rising risks of fiscal deterioration. They're saying, we don't like the situation now, we're not buying these bonds."