Opinion | The Bond Market Is Flashing a Warning about Trump Tariff and Spending

If you earned about 5 percent every year loaning money to the United States government for a decade, that sounds like a pretty good deal, right? It’s near the highest return you could have received since 2008, and for now, at least, would be widely considered risk-free.

I’m sorry to tell you there are plenty of reasons this may be too good to be true. The bond market is telling us something about the dawn of the second Trump presidency, and it’s not pretty.

Fixed-income analysts and central bankers care about what’s driving the Treasury bond yield, and it’s something called the term premium. That’s the technical phrase for the amount of interest investors demand over and above where the Federal Reserve sets rates. Recently it’s been rising quickly.

The question is why. An increase sometimes suggests investors foresee a robust period of long-term growth that might require higher rates in the future to cool things down. In recent weeks, however, it appears to reflect their worries much more than their optimism.

This shouldn’t come as a surprise. Most of the policies proposed by President Trump, from tariffs to additional fiscal stimulus to deportations that tighten the labor market, are expected to add to inflation. And to the degree they are enacted, they will combine with an inflation rate that has declined rapidly, but which remains above the Federal Reserve’s target and is still higher than it was during most of the decade leading up to the pandemic. Rising long-term rates are bad for businesses and households that need to borrow, since the cost of loans such as mortgages and auto loans is directly linked to 10-year Treasury yields.

Evidence of consumer and investor worry abounds. The University of Michigan’s latest consumer survey saw expectations for longer-term inflation rise to 3.2 percent, one of the highest levels recorded since 2008. Minutes from the Federal Reserve’s December policy meeting showed that “all participants judged that uncertainty about the scope, timing and economic effects of potential changes in policies affecting foreign trade and immigration was elevated” and “the risks around the inflation forecast were seen as tilted to the upside.” Translation: There’s probably going to be more inflation.

That means that the central bank will find it harder to cut rates. Already, financial markets have reduced their expectations of Fed cuts in 2025 to one or two, compared with five or six just three months ago. Most of the time, a relatively hawkish Fed will raise yields for all kinds of bonds.

Concern that the new administration will increase the budget deficit is also a factor. Even before any new stimulus this year, the Congressional Budget Office has estimated the budget deficit will widen from $1.9 trillion in 2025 to $2.7 trillion by 2035.

The Treasury will need to increase the amount of bonds it issues to fund bigger deficits. The Fed is also selling its own stock of bonds left over from post-financial crisis rescues, which adds to the need to find willing Treasury buyers. Many potential overseas buyers are set to face increased tariffs from the United States and may prefer investment options outside America. Economics 101 tells us that more supply without corresponding demand pushes down prices. In the case of bonds, lower prices mean higher yields. Investors are saying, essentially, they want to be paid more to hold America’s debt.

Since bond yields act as a starting point for many other borrowing costs, families feel the hit quickly. The point was made clear this month in a speech by the New York Federal Reserve president, John Williams. He said rising costs for home mortgages mean less money for essentials such as food, health care and child care. “The repercussions reverberate through all aspects of our economy,” Mr. Williams noted. “Housing affordability affects the ability of communities to attract businesses, and it affects the ability of employers to attract and retain workers and grow their businesses.”

Higher yields, for borrowers, at least, are always a challenge. For households and businesses, the same factors driving yields — inflation and fiscal concerns — can also weigh on their confidence and expectations for growth. In such an environment, equity values can fall at the same time bond yields rise. That’s bad news for your 401(k). And for companies, borrowing costs could go up at the same time their share prices are declining. That bodes poorly for hiring and investment budgets. A negative feedback loop can form quickly.

We saw this in the third quarter of 2023, after the Treasury announced it would need to issue more debt than had been expected. The government’s credit rating was downgraded by Fitch Ratings and the 10-year Treasury…