During a 20-year Treasury auction, trading floor screens typically don’t flicker. The financial system’s plumbing issue usually resolves on its own, much like a city’s water system does. Not many people pay attention. It wasn’t like last week. Within hours, the stock market followed the bonds down as yields drifted above 5% and demand softened in a way that traders described as unsettling. The people who watch this stuff for a living have begun to speak in hushed tones because something is shifting beneath the surface.
Experienced market observers believe that bonds are currently a better lie detector than stocks. The chief global economist at PGIM, Daleep Singh, who once spearheaded the Biden administration’s attempt to cut off Russian oil revenue, doesn’t sound particularly alarmed, but he also doesn’t sound at ease. There is no indication that the war in Iran will end. The price of oil continues to rise above $100. Additionally, the steady, grinding sale of long-dated U.S. government debt raises questions about the nation’s fiscal direction and inflation. The yield on the 10-year Treasury, which subtly influences credit card bills and mortgage rates in American living rooms, increased by nearly 24 basis points in just one week.
Pausing on that number is worthwhile. Although a 24 basis point increase doesn’t garner as much attention as a Nasdaq decline, it permeates daily life surprisingly quickly. In just a few days, homebuyers in cities like Charlotte or Phoenix can sense it. Auto dealers sense it. The family that was on the verge of refinancing is now unable to do so. As this develops, it’s difficult to ignore how infrequently Americans relate the price of a 30-year mortgage to what some midtown institutional bond trader did on a Wednesday at 11 a.m.
Speaking on Zoom on a Friday, Singh shocked some onlookers by complimenting Kevin Warsh, the conservative economist who Donald Trump had recently appointed as chair of the Federal Reserve. Singh maintained that Warsh, who has been put to the test during the global financial crisis, is aware of the central bank’s one true asset: credibility. In his conversations, that word kept coming up. legitimacy. Investors are unaware of it until it disappears. And he was direct about one thing: despite political pressure, the Fed shouldn’t be lowering rates right now.
However, the Fed isn’t actually the root of the issue. It has to do with deficits. With a debt-to-GDP ratio close to all-time highs and a deficit that is about five percentage points larger than what is normal at full employment, the beginning point for 2025 is unsettling. The House passed the “One, Big, Beautiful Bill,” which prolongs tax cuts without paying for them in full. As a result, more Treasury bonds will be issued, giving the market more bonds to absorb. Whether this is true or not, investors appear to think that no one in Washington is genuinely planning to reduce the deficit.
The other side of the story is tariffs. During Trump’s first term, businesses covertly rerouted trade through Mexico and Vietnam because the bark was louder than the bite. At least it may feel different this time. An initial 10% universal tariff might raise inflation to a maximum of 3%. The situation that affects stocks the most is when yields increase due to inflation rather than growth.
It’s possible that none of this ends badly. Deals might take place. Spending reductions are possible. Inflation might act in certain ways. However, the bond market is making a statement in a peculiar, almost monastic manner. It’s still unclear if anyone in the equity world is paying attention.