The bond market's having a rough week. Yesterday, Treasury yields kept climbing after the House passed President Trump's tax reform bill—a package he's been calling "big beautiful" with his usual restraint. Ten-year yields pushed north of 2.4%, hitting their highest mark since March, while the selloff infected the longer-dated securities too.
It's weird, isn't it? Bond markets are supposed to be the sensible, predictable part of the financial ecosystem. The place where cautious money goes to hide. But lately they've been acting like they've got something to prove.
I've been watching yield movements for years, and what we're witnessing is markets finally acknowledging what they've been trying to ignore: pumping fiscal stimulus into an economy already approaching full employment is—how shall I put this?—not exactly textbook economics. The House bill would pump up the deficit by roughly $1.5 trillion over a decade, and bond traders (who tend to be a pragmatic bunch) are reacting exactly how you'd expect.
The mechanics aren't complicated. Bigger deficits mean more Treasury issuance. More bonds flooding the market pushes prices down and—since they move in opposite directions—yields up. Add the possibility of slightly higher growth and inflation, and suddenly those bond vigilantes have saddled up for a ride.
What's telling is the timing. Markets didn't bother waiting for the Senate version or the inevitable horse-trading in conference committee. They're moving now. Which suggests... what? That traders have already calculated this thing's getting done before the ball drops in Times Square? The cynical take (and Lord knows I can be cynical) is that markets believe tax cuts are the one thing Republicans can actually agree on, regardless of their other differences.
Meanwhile, the yield curve keeps flattening despite the broader selloff. The gap between 2-year and 10-year Treasuries narrowed to about 63 basis points—the tightest since 2007! This happens because short-term rates are rising faster than long-term ones. Translation: investors think the Fed will keep hiking rates but aren't sold on the long-term growth story.
There's something almost poetic about it. The administration is pitching this tax package as an economic miracle that'll pay for itself through growth. But the yield curve is basically saying, "Yeah... we'll see about that." Markets have this annoying habit of ignoring political promises.
For businesses, this bond tantrum creates a complicated calculus. Higher Treasury yields mean steeper borrowing costs, but lower tax rates could mean fatter after-tax profits. I've spoken with several CFOs who are constantly revising their projections, trying to figure out whether they come out ahead or behind.
Real estate folks are particularly antsy. The House bill caps the mortgage interest deduction for new purchases at $500,000 instead of the current million-dollar limit. That could take some steam out of high-end housing markets. Throw in rising mortgage rates (which follow Treasury yields like a shadow), and the housing sector—which, remember, finally recovered from its last meltdown—faces some serious headwinds.
So what's an investor to do? Hell if I know for certain.
Conventional wisdom says shorten your duration and rotate toward sectors that'll benefit from the tax changes. But conventional wisdom hasn't exactly been nailing it lately, has it?
Perhaps the most level-headed approach is simply recognizing we're entering unfamiliar territory—a fiscal policy environment where deficits expand during economic growth periods. The last major tax cuts during expansion came under Bush 43, and, well... that movie didn't have a happy ending.
At day's end, bond markets are sending us a message worth considering: nothing comes free, not even a "big beautiful" tax cut. The bill always comes due. It's just a matter of who's around when the check arrives.
