30-year Treasury yield spikes to 5.09%, 10-year yield hits 4.61% as GOP bill raises deficit concerns

Treasury yields moved back to levels that have pressured the economy and financial markets in the past as investors feared a new U.S. tax bill could worsen the country’s budget deficit, a risk highlighted in a Moody’s downgrade of the U.S. credit rating to end last week.

The 30-year Treasury bond yield was up about 12 basis points to 5.09%, breaking above the key 5% level for the second time this week and reaching a level not seen since October 2023. The 10-year yield topped 4.6%, and was last 11 basis points higher at 4.59%, returning to levels that caused turmoil in the markets back in April and played a part in President Donald Trump pausing his stiffest tariffs. The 2-year yield advanced 4 basis points, reaching 4.01%. One basis point is equivalent to 0.01%, and yields and prices move in opposite directions.

A poor auction at 1 p.m. ET for 20-year debt was the catalyst for taking yields to their highs of the session. BMO called the 20-year auction “lackluster.” The fear is that the buying appetite for U.S. Treasurys could be drying up as the supply of new debt to pay our bills increases.

Investors are keeping an eye on discussions around U.S. President Donald Trump’s budget bill with Republicans haggling over the size of deductions for state and local taxes. Republicans worried about the spending in the bill are meeting with Trump at the White House on Wednesday to hammer out disagreements. If approved by Memorial Day, as is the goal for House speaker Mike Johnson, the bill could end up increasing the U.S. government’s deficit by trillions at a time when fears of a flare-up in inflation due to Trump tariffs are already weighing on bond prices and boosting yields.

“While the selling of U.S. Treasuries in the immediate aftermath of the Moody’s downgrade was relatively modest, Treasury yields have climbed steadily since the end of April as budget negotiations have come to the fore,” wrote Mark Haefele, UBS Global Wealth Management chief investment officer, in a note Wednesday. The Republicans’ bill “is expected to add trillions of dollars to the country’s [$36 trillion] deficit over the next decade. This will likely lead to an increase in the supply of Treasury debt, exerting pressure on the bond market.”

Late Friday, Moody’s downgraded the U.S. government’s credit rating, citing the increasing burden of financing the government’s ballooning budget deficit. That sent the 30-year Treasury yield surging past 5% on Monday for the first time this week.

“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” Moody’s said in the report.

Bridgewater Associates founder and billionaire Ray Dalio added on Monday that the Moody’s downgrade poses a greater threat to U.S. Treasurys than realized, as the credit agency isn’t even considering the risk of the federal government printing money to pay its debt.

“They don’t include the greater risk that the countries in debt will print money to pay their debts thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting (rather than from the decreased quantity of money they’re getting),” Dalio said in a post on social media platform X.

If government issues more and more debt to pay its rising obligations, the increased supply would theoretically lower bond prices and spike yields.

Economists, for now, are not expecting a recession this year now that Trump has backed off his highest tariffs. However, with 30-year and 10-year yields as benchmarks for consumer loans like mortgages, rising rates could raise that recession risk.

The Mortgage Bankers Association said on Wednesday that mortgage applications dropped 5.1% in the previous week because of rising rates.

« Go Back