MAY 22, 2025
Speaker of the House Mike Johnson, accompanied by President Donald Trump. – Andrew Harnik/Getty Images
President Donald Trump’s aggressive effort this week to line up Republicans behind the cornerstone of his economic agenda has coincided with a perilous warning: The bond market gets a vote, too, and is signaling an early “no” on his Big, Beautiful Bill.
The bill, passed by the House of Representatives Thursday marked a significant win for the White House and its House Republican allies. But the tax cut bill also reignited months of simmering market anxiety about the stability of the US financial system and drove a sharp Treasury selloff as investors weighed the risks posed by estimates the bill would pile additional trillions onto the US debt.
The resulting jump in bond yields to near two-decade highs raised long-term borrowing costs and served as a stark warning for the path ahead that was echoed privately by a handful of Trump allies and to CNN and publicly by one of Trump’s most fervent defenders.
“We are going to lose the ability to make our own decisions,” said Steve Bannon, the first-term White House adviser who maintains deep ties across the current administration, on his “War Room” podcast Wednesday afternoon. “The bond market is gonna get a vote here, and we don’t want the bond market dictating the terms of what the United States does. The reason you get into these kinds of situations is because your debt gets out of control and they don’t see any kind of path.”
Even as yields on the 30-year Treasuries stabilized on Thursday, the risk of a bond market rebellion now hangs over Trump’s cornerstone legislative priority at a moment the White House is unequivocal about driving it forward and through the Senate. There is no alternative.
This week thrust onto center stage the Gordian knot confronting Trump and congressional Republicans. Trump’s entire economic agenda is contingent on the tax and spending bill’s passage at the same time the bill’s passage could trigger bond market vigilantes to unravel Trump’s entire economic agenda.
The tax bill is one leg of the Trump administration’s three-legged stool economic plan, built on tariffs, spending cuts and tax cuts. If any one element comes up short, the whole thing collapses. If they lose the tax incentives or deregulation, the government would have few tools to incentivize businesses to undertake the planning, investment and reshoring triggered by the historic tariffs Trump has imposed. Without the tax cuts, American consumers would get locked into a high-price, tight-credit economic environment.
That could implode political support for Republicans and would probably destroy any chance of Republicans maintaining their congressional majorities.
But if Republicans don’t reverse course, which they almost certainly won’t, they risk adding more pain for American consumers, too.
Just about anyone with a credit card, car loan, student loan or mortgage needs to pay attention. Those loans are historically benchmarked to the same yields on a steady upward trajectory.
Bond rates also affect businesses’ credit, they set prices for financial assets around the world, and they impact America’s role as the safest of all safe-havens for investors. That took a serious blow Friday evening when Moody’s became the last major credit rating agency to downgrade America’s debt from its perfect AAA rating, signaling to the world that lending to the debt-ridden United States comes with some risk.
“People say well deficits don’t matter. It doesn’t matter? Hey, check your credit card, check your home loan,” Bannon said on his podcast, which carries significant influence with Trump’s MAGA base and the advisors representing the populist wing within Trump’s administration. “The 10-year Treasury runs your life. Everything – credit cards, student loans, auto loans, all of it.”
A Pyrrhic victory
The House’s passage of Trump’s “One Big Beautiful Bill” on Thursday morning is an unambiguous testament to the president’s grip on the Republican Party and a critical step forward for the lynchpin of his economic aspirations.
That a weeklong selloff in bonds sharply accelerated after that vote only exacerbated concern that the victory may be viewed as the Pyrrhic variety. US long-term borrowing costs continued their steady ascent to levels nearing a two-decade high.
The cross-cutting nature of events is disorienting for the world’s largest economy and described by one Wall Street executive in a text to CNN shortly after the vote as “certainly unnerving, in large part because nobody’s really sure where this all goes from here.”
For Trump’s economic agenda, uncertainty has certainly been a feature, not a bug. Trump has relished the effect that has had on the raft of urgent trade negotiations sparked by his trade policy, according to senior White House officials.
But the uncertainty has a cost – in the near term for US businesses left in a state of planning paralysis, but also over the long term to the view of the US economy.
That, in turn, creates a very real cost to just about everyone – and poses an acute threat to Trump’s aspirational “new Golden Age.”
The worst-case scenario
As a result, mitigating that threat is more than just a market confidence or perception issue. Surging bond rates raise the risk of a spiral that just a few months ago would have been viewed as unthinkable in the near term.
The worst-case scenario remains remote – one of the few things the vast majority of market participants and White House officials agree on these days. But it remains a possibility, and a terrifying one.
Treasury Secretary Scott Bessent captured it concisely during a hearing just two weeks ago when he was asked by Congressman Chuck Edwards what it would look like if the US government’s debt levels became “unsustainable.”
“It would look like a sudden stop in the economy as the credit would disappear as markets would lose confidence,” Bessent said. “I’m committed to that not happening, and again, a tipping point in sustainability is very difficult to pinpoint, but what is not difficult to pinpoint is a trajectory, and the trajectory is unsustainable.”
“When and if the markets were to rebel against is very difficult to know,” he continued. “I think that it’s very important not to go on the warning track, and we’ve got to get to the other side of this and start reducing the debt.”
The best-case scenario
Although the worst-case scenario may be unlikely, that’s also true of the best-case scenario for Trump.
A rapid rollout of bilateral trade deals could assuage the looming tariff deadline concerns, bringing broader certainty on trade. Continued positive vibes on the Trump administration’s China talks could also assuage markets.
Meanwhile, if tariff revenues continue to tick up from tariffs that are in place, that could alleviate some concerns that the passage of the Big, Beautiful Bill would add too much to the deficit. The bill also has the added benefit of removing a massive near-term risk – the debt ceiling – off the table, enabling America to make good on its debt obligations.
Businesses could grow more certain about the economy from the passage of the tax cut bill and more trade deals, both of which would be viewed as pro-growth and pro-business. That could reignite corporate investment and restore faith in America’s economy.
If, then, spending talks in September somehow lead to bipartisan support for sharply reduced spending, then perhaps Trump’s promise of a new economic Golden Age is possible, after all.
Of course, the problem with that scenario is it requires a lot of things to go right all at the same time – and therein lies the biggest, yet least-understood risk Trump faces: Everything in his plan is connected to everything else. At its conception, his economic agenda was a high wire act with not net – one that mainstream economists from both parties largely found completely implausible.
Trump and his administration have already made their lives dramatically more complicated with the chaotic rollout of their trade policy. And the tax bill is far less pro-growth than they would’ve ideally had, as the bill makes the biggest corporate incentives temporary while backloading all the biggest cuts and fiscal restraint.
Getting ‘yippy’
For all the ways Trump and his advisors have bulldozed and bent to its will seemingly every obstacle and opponent in its path the last few months, those same White House officials are keenly, if quietly, aware that the bond market may be the most uniquely immune actor to Trump’s executive authority – no matter how expansive he views its reach.
That’s not based on speculation. It’s based on Trump’s own actions last month when CNN reported palpable concern about investor discomfort with US debt – or, in Trump’s words a bond market that was “getting yippy” – sparked a dramatic pullback in the tariff policy that had rattled the global financial system.
Trump has since been dismissive of the bond market’s role in his decision and Treasury Secretary Scott Bessent has claimed, however tenuously, that the 90-day pause on the administration’s draconian “reciprocal” tariff rates was all part of the plan.
Bessent, in an off-the-cuff quip at a finance conference earlier this month, appeared to confirm what sources made clear was central factor in the decision.
“I’ve got this app on my phone that anytime the US government prices change by more than 2% in two hours, off my phone goes…” Michael Milken started to tell Bessent during a moderated conversation between the two in Los Angeles.
“Please don’t share that with the president,” Bessent, cutting Milken off, quipped to widespread laughter from the audience.
The decision to reverse course on “Liberation Day” tariffs, at least temporarily, settled the bond markets and has driven a rally in the stock market that has equities at a higher point than they were before the tariffs were announced. But the Moody’s downgrade and the market suddenly grasping the roughly $4 trillion debt load Trump’s tax cuts and spending bill would pile on has brought the April anxiety back to the forefront.
The news of weak demand at a Wednesday afternoon bond auction accelerated that unease in a dramatic fashion. It also brought back to mind the particularly handy reflection dished out by a top White House official more than three decades ago.
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter,” the eminently quotable Democratic political operative James Carville said after President Bill Clinton’s White House was singed by investors. “But now I would want to come back as the bond market. You can intimidate everybody.”
Courtesy/Source: CNN
