After a spike in U.S. bond rates forced then-President Bill Clinton to back down from his spending plans in 1993, James Carville, one of his top advisers, told The Wall Street Journal, “I used to think, that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
For the next couple of decades, interest rates on U.S. government debt fell and stayed down. It seemed like the bond market had abdicated its role as a great legislative bully.
Well, the bully is back. It’s already won its first fight with the Trump administration, over tariffs — and this week, it is clearly squaring up for another battle over the House GOP’s massive tax cut and spending package.
The bond markets’ initial victory came when President Donald Trump suspended the tariffs he announced on April 2 just hours after they went into effect on April 9. Why the almost immediate cave? Here’s what the president said: ”I was watching the bond market. The bond market is very tricky. I was watching it. But if you look at it now, it’s, it’s beautiful. The bond market right now is beautiful. But yeah, I saw last night where people were getting a little queasy.”
What the president saw was an acceleration of a post-Liberation Day sell-off in American government debt. Investors were unloading U.S. Treasurys, sending yields soaring. (When the price of a bond falls, the relative amount it pays investors, called the yield, rises. It’s a see-saw-like mathematical relationship, so the financial press often uses “bond prices fall” and “yields rise” interchangeably.)
Tumult in the U.S. Treasurys market is an event with financial consequences unlike any other. There’s $28 trillion in U.S. government bonds. That debt is a global financial safe haven and international benchmark. Trillions and trillions of dollars of mortgages, personal debt and corporate debt are priced based on U.S. Treasurys. If you had to choose one number to track the vitality of the American economy and centrality of the United States government in the global order, it would be the price of Treasurys.
And now, the bond market is having its say on the president’s massive tax-cutting and spending-slashing bill, which the House GOP just barely managed to pass early Thursday: Treasury yields soared in recent weeks as the details of the legislative package came into focus and now are well above the rate that forced the tariff “pause” in April.
A lot of the coverage for why the bond market doesn’t like the “big, beautiful bill” focuses on the fact that its policy changes will increase government debt by slashing taxes without raising anywhere near an equal amount of revenue elsewhere. But the bond market doesn’t always react this way to a growing national debt. The post-Clinton administration U.S. is a great example of this: Debt grew and rates came down and stayed down for decades.
Part of this, of course, is due to a global phenomenon that came out of the 2008 financial crisis known as “Zero Interest Rate Policy” or known as ZIRP, where central banks around the world kept interest rates at or around zero for years.
But a big part of why the bond market hates the GOP tax cuts is how they increase the debt: The bill cuts taxes for the rich while cutting spending on social safety net programs. Overall, economist Justin Wolfers summed it up as “the largest redistribution from poor to rich in American history.”
As a result, the GOP budget bill won’t just increase the annual government deficit, it will hurt economic growth. That’s because tax cuts to the rich provide less juice to the economy than other types of spending. Rich people are, well, already rich, so they have less of what economists call “marginal propensity to spend” the extra money they get to keep. Trump’s budget also cuts programs that directly increase economic growth, like clean energy tax benefits from the Inflation Reduction Act.
Add to that the fact that Trump’s tariffs remain at levels that amount to one of the greatest tax increases in American history, the cost of which will be borne disproportionately by middle- and lower-income consumers, and the outcome is simultaneous and wildly hypocritical fiscal austerity and profligacy that will hamper growth and increase the national debt.
All the while, Europe, after more than a decade of destructive adherence to austere fiscal principles, is finally ramping up government spending, giving investors looking for debt issued by relatively prosperous economies governed by the rule of law an alternative to U.S. Treasurys.
This is more than enough to draw the bond market into another confrontation with the Trump administration. The first time around, the president did what the bond market wanted. This time around, with Republicans seemingly dead set on passing a bill the U.S. Treasurys markets hate while Trump gets back to announcing tariffs on a whim, the bond market bully is going to need to get even more aggressive to get the GOP to do its bidding.