The bond market’s biggest risk isn’t the deficit, economist says. Here’s what is.

President Donald Trump’s massive tax and spending bill has been the latest big headache for bond investors, but TS Lombard economist Dario Perkins says there is a much bigger threat to the market: Chaotic U.S. policymaking.

As Trump’s spending bill continues to move forward, some economists warn that the proposal’s tax cuts might force the government to borrow more money, widening the fiscal deficit and ballooning the country’s $37 trillion pile of debt. A greater supply of government debt, in turn, would lower existing bond prices and push up yields. (Yields move in opposite direction of bond prices.)

Analysts have even made comparisons to the cautionary tale of British Prime Minister Liz Truss—her mini-budget’s proposed unfunded tax cuts in 2022 triggered a sell-off in bonds and shortened her tenure to mere 49 days.

But such jitters about fiscal crises are “unnecessarily alarmist," according to Perkins. To him, the biggest risk is roller-coaster policymaking.

“The big risk is not fiscal deficits but U.S. policy chaos against the backdrop of a world that is already more susceptible to negative supply shocks," he writes.

The rapid fluctuations in federal policy have arguably been palpable since the Trump administration placed aggressive tariffs on global trade partners, only to walk back on them days later. The U.S. is now attempting to put together trade agreements with several dozens of countries in a matter of 90 days—they typically take years—all while conducting broad-based deportations.

Against this backdrop, there’s now a question of U.S. involvement in the Israel-Iran conflict. A broader war would threaten to push up inflation and lead to supply-chain disruptions if Iran potentially blocks the Strait of Hormuz—a critical global shipping channel. Higher inflation is the nemesis of the bond market because it chips away at the value of returns.

Unpredictable U.S. policies raise a deeper fear: They could undermine the role of U.S. Treasuries as a global risk-free asset, Perkins writes. If bonds become less valuable as a portfolio hedge, they will be less attractive to investors—regardless of the size of the U.S. budget deficit or the balance-sheet policies of central banks, he added.

Taken together, these concerns suggest Trump’s budget proposal may be lower in the pecking order of threats to the bond world.

For now, the bond market seems to be just waiting it out as a quiet spectator. Yields have basically gone nowhere for long-dated Treasuries lately. The 1o-year yield has ranged between 4.518% to 4.359% since May 23, while the 30-year yield has closed between 5.041% and 4.848% over the same period.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.