The bond market may need to keep an eye on Trump’s new tax plan, which could pass this summer and could add trillions of dollars to the already massive U.S. deficit.
“I think, at the margin, it (the new tax plan) will keep yields higher,” Kathy Jones, chief fixed income strategist at Charles Schwab, told me on Yahoo Finance’s Opening Bid podcast.
Jones has worked as a bond market assessor for more than 16 years at firms including Morgan Stanley and Charles Schwab.
“The Treasury market is driven by three things: typically the Fed’s policy, the policy of inflation, and the policy of the economy,” Jones explained. “Deficits have never had a big impact on the market, but there is a risk premium on long-term bonds, especially Treasuries, which is the term premium. That premium has widened recently, and I think it will continue to widen if we pass this type of budget deficit bill. I think the term premium will push long-term yields higher.”
Bond market expert Larry McDonald also agreed with Jones’s view, saying in his opening bid this week that the bond market will be in trouble, in part because of high deficits.
A tax deal is starting to take shape.
U.S. Treasury Secretary Scott Bessant told me this week that a tax deal is close.
“So right now there’s a lot of focus on tariffs, but we’ve had good luck with the tax bill — or very, very good progress, which is not luck because we’ve worked hard,” Bessant said. “So the tax bill is going through the Senate and the House. I think we’ll have some permanent changes to the TCJA by probably by July 4. I think that will give people certainty.”
About $4.5 trillion in tax cuts are about to expire as part of the TCJA. The bill is set to expire on December 31, 2025.
The House recently passed a budget bill that includes trillions of dollars in cuts to taxes and government spending.
The package would cut taxes by about $5 trillion. It would also increase the government debt by $5.7 trillion, according to news reports.
In the past month, the bond market has experienced several shocks due to the sharp fluctuations in tariff news, which means that yields may remain high in the short term, with negative economic consequences such as rising borrowing costs.
The 10-year Treasury yield has risen to 4.30%, and mortgage rates are close to 7%. Just last week, as tariff concerns swept the market, the 10-year Treasury yield rose 50 basis points to about 4.5%, the highest level in more than two decades.
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