Trump’s tax bill, credit downgrade and weak Treasury auction drive yields to multiyear highs, with ripple effects felt worldwide
A global rout in government bonds has intensified following a cascade of fiscal shocks in the United States — including a weak Treasury auction, a controversial Republican tax bill, and a credit downgrade — shaking investor confidence and sparking a rapid repricing of long-term debt across major economies.
The U.S. 30-year Treasury yield surged past 5.14% this week, its highest level since 2023 and, before that, not seen since 2007. The benchmark 10-year yield rose above 4.6%, as investors dumped bonds en masse, demanding greater compensation for what they now view as mounting fiscal risk.
At the heart of the sell-off is President Donald Trump’s “Big, Beautiful Bill” — a sweeping tax and spending package that passed the House by a single vote. Independent analysts estimate the bill will add at least US$3 trillion to the national debt over the next decade, reviving fears that the U.S. is drifting toward a debt spiral.
Treasury auction stokes alarm
Investors’ discomfort was laid bare during Wednesday’s US$16bn auction of 20-year Treasurys, where demand was the weakest since February. Primary dealers were forced to absorb a larger-than-average share, signalling a lack of enthusiasm among global buyers.
“Markets do not find Trump’s ‘Big, Beautiful Tax Bill’ beautiful at all,” said Vishnu Varathan of Mizuho Securities, adding that long-term U.S. Treasurys were “beaten up in an ugly sell-off.”
The poor auction followed last week’s decision by Moody’s to strip the U.S. of its last remaining AAA credit rating, citing concerns over the nation’s long-term debt trajectory and persistent political gridlock.
According to Russ Mould, investment director at AJ Bell, the U.S. is now “staring into an emerging market trap,” where rising borrowing costs feed back into higher deficits and growing reliance on future easing, inflation, or both. “This is the kind of doom loop emerging market investors know too well — only now it’s the U.S.,” Mould said.
Contagion spreads to global markets
The bond sell-off has not remained confined to the U.S. Japan and Germany, long seen as havens of fiscal stability, are also experiencing pressure.
Japan’s 40-year government bond yield hit a record 3.689%, while the 30-year and 10-year yields climbed to 3.187% and 1.57%, respectively. Analysts attribute the shift to structural changes in domestic demand — notably a pullback by Japanese life insurers who had previously bought long-dated bonds to meet regulatory criteria. The Bank of Japan’s cautious move toward tightening policy has further unsettled markets.
“The closing yield gap between U.S. and Japanese bonds is prompting capital repatriation,” said Paul Skinner of Wellington Management. “Japanese investors now see 3.1% yields at home without the currency risk — why keep money in U.S. bonds?”
In Germany, 30-year bund yields rose more than 12 basis points this week. The retreat of Europe’s “debt brake” and increasing military spending have sparked fears that fiscal discipline may be giving way to structurally wider deficits. “The end of Europe’s pro-austerity bias is a major shift,” said Robeco strategist Philip McNicholas.
Wall Street and Main Street respond
U.S. equity markets have responded with growing unease, and the bond sell-off is already being felt on Main Street. Mortgage rates tied to Treasury yields have surged to 6.86%, the highest level in over three months, according to Freddie Mac. Rising yields also threaten to make auto loans, credit cards, and other forms of borrowing more expensive, potentially weighing on consumer spending and growth.
Debt hawks in Washington, meanwhile, are voicing alarm. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, called the passage of Trump’s bill — just days after a credit downgrade and a failed auction — “maddening.” The U.S. has already spent US$684bn on interest this fiscal year, amounting to 16% of federal outlays. That figure is poised to grow as borrowing costs rise.
“The market’s queasy here with this move in rates,” said Peter Boockvar of Bleakley Financial Group. “We are entering a cycle where high borrowing costs reduce room for spending, even as fiscal needs rise.”
Foreign appetite for U.S. debt fades
Foreign investors are reassessing their exposure to U.S. debt. Deutsche Bank’s George Saravelos said the combination of rising yields and a weakening dollar points to a “buyer’s strike” on U.S. assets. Citi analysts echoed this, warning that reduced tariff revenues and increased spending under the Trump plan are shrinking the U.S.’s fiscal space and global credibility.
Kathy Jones, head of fixed income at Charles Schwab, said capital inflows may dry up unless policy shifts. “We’re effectively limiting capital inflows while our need for funding is exploding,” she said.
Eyes on emerging markets
As developed-market bonds lose favour, emerging markets are seeing renewed interest. India and China, with capital controls and domestically-driven bond markets, have seen yields fall modestly. Indonesian 10-year sovereign bonds now offer yields around 7%, attracting investors seeking both income and diversification.
“Emerging market debt, when managed actively, offers opportunity amid the chaos,” said Kingswood’s Chris Metcalfe. “The rotation away from U.S. assets is real — and it’s accelerating.”
What comes next?
Analysts say the immediate path forward hinges on whether Senate Republicans amend the tax bill, and whether bond markets stabilise. “Either the U.S. revises the reconciliation bill for tighter fiscal policy,” said Saravelos, “or the dollar value of U.S. debt will need to fall until foreign investors return. Brace for more volatility.”
For now, the message from global bond markets is clear: fiscal credibility matters. And investors are no longer willing to wait for Washington to get its house in order.
