Donald Trump calls his tax and spending plans “big and beautiful,” calling for a first generation opportunity to strengthen the prosperity of the US economy. The bond market disagrees.
After the chaos was unleashed by the tariff announcement last month on “liberation day” in the latest showdown with Wall Street, global financial markets are rattling once more by the US President’s one big beautiful bill law. Plans to hit the EU with 50% tariffs on all import duties have been added to investors’ headaches.
Reflecting growth, yields are actually threatening to increase interest rates by more than 5% on 30 years of US government bonds, reaching their highest level in 18 years. Meanwhile, Moody’s, a major credit rating agency, relied on large investors last week.
The heart of concern is that implementing the US so-called “twin deficit” position (when public spending exceeds revenue) and the trade deficit (when imports exceed exports) will expand Trump’s policies and put the US economy in a recession.
Mark Dowding, chief investment officer of hedge fund RBC Bluebay Asset Management, said the president appears to be happy with “serene and carrying” despite increasing investor anxiety.
“Laffer Curve Economics has influenced thinking in the US and has encountered an increasing number of skepticism by bond market investors interested in an astounding increase in bond trajectories,” he said. “Essentially, Washington dumped the gauntlet into the bond market.”
Under one big beautiful bill law, Trump first introduced in 2017 but expired at the end of 2025, which extended the trillion dollar tax cuts, offset by controversial cuts to some Medicaid spending areas, including the low-income health care system.
The Non-Participant Committee for Responsible Federal Budget estimates that the measure will increase the US annual deficit to 2.9TN (2.1TN) by 2034 (6.9% of US GDP), or 3.3TN (7.8% of GDP) if time-limited policies are permanently implemented.
Running these massive annual deficits was added to the US unpaid debt pile, which was 28.2TN (97.8% of GDP) in 2024, and was already on track to reach nearly 50 or more by 2034 (117% of GDP).
However, Trump’s action could add another 3.3tn in 2034, which would be 125% debt-to-GDP ratio or 5.2TN (129%) if made permanent.
Economists discuss the risks of high debt levels. In some countries, debt ratios above 100%, including Japan, are above 260%, and there are no accurately agreed risk zones. Unlike households, the government has the power to print currency, change tax and expenditure plans, and set laws. It’s pointless to compare it to family credit cards that make the most of it. Borrowing can help the government if it laid the foundation for strengthening future economic growth.
However, a sustained deficit and growing debt levels could erode investors’ confidence in the country’s ability to successfully make IOUs. This can further boost borrowing costs as investors demand higher premiums. Higher interest rates push up debt guarantee bills, but large amounts of debt can “crowd” more productive private investments in favor of government bond parking cash.
For decades, the US has enjoyed cheaper borrowing costs than many other countries, especially given the annual deficit that has become known as Washington’s “exorbitant privilege” and the scale of its vast unpaid debt pile.
But investors are warning that they have run out of patience. Trump’s increasingly unstable policymaking is because he abandons the postwar consensus that buying US assets is the safest place to put your money in.
Trump can argue that his tariff policies will bring in revenue to offset the costs of tax cuts, and that his vast giveaways could stimulate economic spending by putting more money into businesses and consumer pockets.
However, non-partisan tax foundation think tanks believe that if US tariffs are permanently enforced, they could raise 2.1TN between 2025 and 2034, but are expected to be reduced by 0.6% before retaliation measures are considered.
“Our borrowing concerns will not go away, and the irony of all the worries about tax and spending bills is that there will be little concrete differences in economic growth over the next few years,” an analyst at ING Bank wrote to the client.
Conversely, ThinkTank says Trump’s tax cuts could increase long-term GDP by 0.6%, but it costs $410 million in revenue forgotten over the same period.
The bond market has a turnover, but it also affects the world as a whole. This is because the US bond market serves as a key reference point for other securities around the world. In other words, rising US borrowing costs drag the interest rates of other governments higher.
In the UK, 30-year bond yields have reached a high since the late 1990s this year, increasing complications for British Prime Minister Rachel Reeves by boosting debt services costs.
Borrowing costs have risen in Japan amid concerns about inflation and amidst the country’s central banks involved years of slow monetary policy. As the US Treasury’s largest foreign holder, investors may start withdrawing money from the US market in favor of rising domestic bond yields.
After the rapid growth of government debt levels around the world, after the 2008 financial crisis, the community pandemic and the economic shock of the current Trump trade war, the challenges are only increasing.