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Market professionals say Trump's tax bill could cause chaos in the bond market.
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That's because the deficit is a big problem for "Bond's vigilant".
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Another showdown between Trump and the bond market is likely to take place later this year.
Tariff chaos may have faded, but if bond investors lose their temper with the tax bill, the market could undergo a policy-driven volatility in the coming months.
President Donald Trump's "Big and Beautiful Act" (a 389-page tax law designed to expand Trump's 2017 tax cuts) could add about $4 trillion in deficit over the next decade.
Among the opposition within the Republican Party, the bill stagnated on Friday, but tax bills could be completed this year.
Any fiscal move that increases the deficit is bad news for bond investors who are worried about the sustainability of government spending and the security status of the U.S. Treasury.
The bond market has been quiet so far. The yield this week fell as the lowered bets are repositioned in the inflation rate data data.
But as the tax bill gets closer to the law, things may change soon.
Yardeni Research President Ed Yardeni predicts that the U.S. Treasury’s 10-year yield could be as high as 5%, while details of the tax law are eliminated. A 5% yield is a key psychological threshold for the market, and stocks that have reached this level have sold out in recent years.
"I think they are very interested in paying attention to this situation," Yardeni said of the bond market. If Republicans try to push the tax bill in their current form, there is another kind of liberating Japanese-style sold-out in government bonds.
Padhraic Garvey, head of research at the Americas, also said that as the tax bill gets closer to the law, his yield has dropped back to 5% to a 5%. He also noted that the U.S. debt ceiling will increase at that time, which may be even more panic about government borrowing.
“That’s going to be an interesting time, and the bond market has to decide, ‘Well, do we like this smell?’”
"The fiscal market doesn't like it," he added.
Peter Berezan, chief global strategist at BCA Research, estimates that there is a 30% chance of seeing a "nightmare scenario" in the bond market, with the new tax bill pushing people to worry about the fiscal crisis and sending U.S. yields soaring 6% in 10 years.
In this case, demand for U.S. government debt securities will be so weak that the Fed needs to step up its purchase of Treasury bonds to help retain government funding.
"What I'm going to say is that the risk of such an outcome is very high," Beresin told BI, although he admits it's not his basic case.
"Unless Trump is willing to cut defense spending on these rights or raise taxes, I don't think he's willing to do it easily. We can see this crisis unveiling in a pretty important way, here, before the Fed stepped in, the yield is huge."
The bond market took Trump's hand in the April market crash against tariffs and received great honors.
Trump later denied that the sharp rise in yields was behind his decision to suspend most tariffs for 90 days on April 9, but admitted to watching the bond market at least because it had a huge reaction to the trade war.
So, who are bond-warning investors who really have power over the president?
It should be clear that the $29 trillion market for U.S. Treasury bonds is the largest in the world, and no one or even investors can easily transfer it.
According to Yardeni, Yardeni is often considered the term, and bond Vigilantes refers to the bond market itself, rather than specific investors, who make their mission to protest policies by selling bonds and spike yields.
According to Yardeni, bond vigilance describes more market responses to policies that may make the Treasury safe.
Currently, bond investors are worried about two giant macro forces:
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U.S. debt. High levels of government borrowing have enabled the U.S. to meet its debt obligations, resulting in a decline in demand for the U.S. Treasury. Anything that makes the prospect of a U.S. deficit (such as tax cuts) reduces the radar of investors.
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inflation. Higher inflation usually means higher interest rates in the economy. This means that services for U.S. debt are more expensive and doubts about whether the U.S. can fulfill its debt responsibilities. The Congressional Budget Office said that in 2024, the government spent $881 billion to pay interest.
Trump said one goal is to lower interest rates for Americans during his term, and he has been closely following the 10-year fiscal yield as a scorecard.
Bond yields were already on the roller coaster this year, when he announced tariffs for the first time in Mexico and Canada, and then rose after his “liberation day” announcement.
Yardeni said he thinks Trump will likely blink in the tax bill to avoid another confrontation with the alertness of the bond market. He said the president wanted to lower interest rates and needed a bond auction to go smoothly, as demand for a share of U.S. Treasury bonds could easily soar to levels that could lead to recession.
"I think the government will take politically vigilance that might appease bonds, but it's not a game of speculation. This news will reveal the progress of the matter and what is actually being implemented, and the bond market will decide whether to make the right choice."
"The potentially passing packages I've seen are trying to make it less dramatic," Garvey told BI on the potential policy trail.
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