Bond Market Watchlist: What’s Coming Next

Trump’s New Tax Plan Could Fuel Bond Market Volatility

As discussions around tariffs dominate headlines, investors may want to shift some focus toward a potentially more consequential development: a new tax proposal tied to former President Donald Trump’s agenda. Expected to push through this summer, the plan could significantly inflate the already ballooning U.S. deficit—adding trillions to federal debt and triggering ripple effects across the bond market.

According to veteran fixed income strategist Kathy Jones, this could be a key driver in keeping bond yields elevated. Speaking on a recent episode of Opening Bid, she noted that while factors like Federal Reserve policy, inflation trends, and economic performance traditionally guide the bond market, deficits may now play a larger role—particularly through the term premium. As this risk premium expands, longer-term Treasury yields could continue to climb.

Tax Bill Momentum and the Deficit Dilemma

Momentum is building for a tax deal aimed at making the 2017 Tax Cuts and Jobs Act permanent, with roughly $4.5 trillion in cuts set to expire at the end of 2025. Treasury Secretary Scott Bessent confirmed that legislative progress is underway, expressing confidence that some version of the plan will pass by Independence Day. The proposed framework is said to include nearly $5 trillion in tax reductions—and while it promises to offer policy certainty, analysts caution that it could raise the national debt by as much as $5.7 trillion.

Market watchers, including Larry McDonald, are raising red flags. They warn that the bond market is entering a fragile phase, made worse by fiscal policies that lean heavily on deficit-financed tax cuts. If these predictions hold, the resulting pressure on long-term yields could impact borrowing costs across the board—from corporate loans to home mortgages.

Yields Rise as Uncertainty Grows

Recent swings in bond yields suggest that investors are increasingly pricing in risk tied to fiscal instability and global trade uncertainty. In just the past month, the yield on the 10-year Treasury surged from around 3.62% to 4.5%, the steepest move in over 20 years. Mortgage rates have climbed in tandem, now hovering near 7%, adding financial strain to consumers and businesses alike.

Such volatility raises broader economic questions. If debt continues to pile up without a clear strategy for repayment, long-term concerns about U.S. fiscal credibility could mount. As Kathy Jones puts it, there’s growing scepticism around the idea that tax cuts will automatically spur enough growth to cover the shortfall. Investors may soon begin to ask the hard question: How sustainable is this approach over the long haul?

Shaun

Founder

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Shaun

Co-Founder