The big beautiful bill isn’t what’s driving bond yields up

I speak of the discombobulations markets suffered this week over U.S. government debt. The yield on the 30-year Treasury bond jumped above 5%, and the 10-year is headed up, too—now at around 4.6%, soon probably higher. An auction of 20-year bonds Wednesday revealed weaker-than-expected demand from investors, an event that contributed to a broad market sell-off.

The timing couldn’t be better if you’re a politician, economist or commentator of a certain ideological disposition. The yield bump coincided with a series of important votes on the mammoth budget legislation President Trump and Republicans are trying to push through Congress. Arguing that the bond vigilantes are voting “nay" is the ultimate appeal to authority. The specific charge is that the extension of the otherwise-expiring parts of the 2017 Tax Cuts and Jobs Act, with an estimated price tag of at least $4 trillion over 10 years, is simply too expensive.

Never mind the implausible propositions you have to swallow in order to believe that what happened this week is a market verdict on the Big Beautiful Bill: That global investors noticed only on Friday evening, following a Moody’s downgrade of Treasury’s credit rating, that the U.S. has been running chronic fiscal deficits for decades. That investors also didn’t bother reading the bill, or any of the media’s dire predictions about its deficit implications, until Wednesday. Oh, and that bond markets placidly accepted the enormous spending binges of the Biden era but now are recoiling from a budget bill that for all its many flaws at least features more spending restraint than we’ve seen in years alongside the pro-growth tax provisions. Huh?

The alternative view is that rising bond yields and skittish stock markets signal broader unease with other key planks of Mr. Trump’s economic program. Namely, trade.

If mainstream commentators are willing to pull their noses out of Wednesday’s news, they’d see that Treasury yields have climbed steadily since early April as markets have digested the twists and turns of Mr. Trump’s “liberation day" reciprocal tariffs. Under this wider view, it’d look like the key moment for bond markets this week arrived on Sunday, when Treasury Secretary Scott Bessent warned that the steep reciprocal tariffs may well return after the current 90-day pause.

Recall that capital inflows are the mirror image of America’s trade deficit. It stands to reason that if imports are slowing (all those reports coming in about slack traffic at container ports and the like), so will the capital influx. Investors also must worry about the drag on American growth of the hundreds of billions of dollars in additional costs that tariffs impose on businesses and consumers.

The trouble with this explanation for recent bond moves is that it provides ammunition only against the part of Mr. Trump’s agenda that’s already unpopular (and not so far off from progressive ideas). It’d be much more convenient for media stewards of Keynesian orthodoxy if they could use the bond news to kill the popular part of the Republican agenda—the tax cuts. Hence the sleight of hand by which they try to blame a large but unsurprising fiscal package for large but equally unsurprising swings in financial markets.

We’ve seen this show before, in the U.K. in September 2022. The British economy then was primed for a financial fiasco, as years of ultralow interest rates and big-spending government had left markets fragile and the economy stuck in first gear. Prime Minister Liz Truss tried to revive the economy with a modest package of supply-side tax cuts.

This set off a bond-market wobble that blew up into a mini-panic thanks to all those pre-existing vulnerabilities, plus a dollop of slapdash financial regulation from a reckless central bank. Ms. Truss became a convenient scapegoat for everyone else’s policy mistakes. She still gets blamed for Britain’s economic problems today, even though her tax cuts were never implemented and bond yields now have settled higher than they were immediately after her budget.

Anything to distract from the manifest failure to deliver robust economic growth of the high-tax, high-spend consensus. Critics of supply-side tax reforms in the U.S. already told us, back in the autumn, that they intended to draw from the same political playbook to try to thwart Mr. Trump’s tax policies, as I warned at the time. They’re jumping into action now.

Congress eventually will have to get serious about spending, especially on entitlements. But if bond markets want something to worry about, worry that this tax bill is the only thing Republicans may do this year to foster stronger economic growth—and that a move now is afoot to frighten them off of doing it.