Presented by QTR’s Fringe Finance
President Trump’s recent enactment of the “Big Beautiful Bill,” a comprehensive fiscal stimulus and infrastructure package, places a spotlight on the U.S. bond market, in my opinion.
This legislation, which primarily accelerates deficit spending amidst a surge in debt servicing costs, is intersecting with a Treasury market that has demonstrated consistent signs of instability over the past year. It is imperative for investors to closely monitor this space.
Libertarians and fiscal conservatives are vocally critical of Trump’s “Big Beautiful Bill,” contending that it encourages unchecked spending, expands governmental authority, and deepens the national debt without oversight. They view it as the latest bipartisan failure to enforce fiscal discipline, particularly in light of the disregard for the debt ceiling and the increasing risk of fiscal dominance, where the Fed is compelled to maintain low rates to fund government borrowing.
Detractors caution that the bill displaces private investment, distorts markets, and sets the stage for inflation and long-term instability, betraying principles of limited government and economic freedom in favor of politically motivated, debt-financed expansion.
Meanwhile, the U.S. Treasury market has exhibited escalating signs of strain over the last six months, reflecting a widening disconnect between fiscal policy and investor confidence.
Multiple long-term bond auctions have witnessed tepid demand, with bid-to-cover ratios declining and yields exceeding expectations, indicating a growing reluctance among buyers to absorb the government’s expanding debt burden. Despite market predictions of Fed rate cuts, long-term yields have remained stubbornly high or even risen, hinting at apprehensions regarding inflation and deficit spending outweighing hopes for monetary easing.
The previously deeply inverted yield curve has started to steepen, not due to optimism, but because long-term yields are creeping higher, a characteristic of market unease about long-term fiscal viability. Volatility in the bond market, as evidenced by the MOVE Index, has remained elevated, while foreign demand from major holders such as China and Japan continues to decline, shifting the responsibility of new issuance onto domestic buyers.
Liquidity in the secondary Treasury market has periodically deteriorated, with widened bid-ask spreads and reduced depth, especially during periods of substantial supply. Primary dealers have reported challenges in absorbing escalating issuance without central bank support, resulting in a noticeable rise in term premiums. These term premiums have surged as investors demand increased compensation for holding long-dated Treasuries, reflecting concerns about both inflation control and the long-term credibility of U.S. fiscal policy.
Additionally, there has been a breakdown in traditional market correlations, with stocks and bonds occasionally declining simultaneously, undermining Treasuries’ role as a portfolio hedge.
Ultimately, there has been a significant shift in investor preference towards shorter-duration instruments like T-bills, indicating widespread hesitance to assume long-term interest rate and inflation risk in today’s uncertain climate.
🔥 JULY 4 SALE – 50% OFF FOR LIFE: Utilize this coupon for a 50% discount on an annual subscription to Fringe Finance for life: Get 50% off forever
Despite the Federal Reserve maintaining its benchmark policy rate within the 4.25%-4.50% range, bond yields have not aligned with the narrative of a gentle economic slowdown or a disinflationary environment.
The 10-year Treasury yield recently reached approximately 4.60%, while the 30-year surpassed 5.08%—levels not observed since late 2023. These movements occurred despite a more dovish stance from the Fed and growing market expectations for rate cuts. Essentially, long-term yields are climbing even as short-term rates are poised to decrease—a classic indication that there is a malfunction in the transmission mechanism between monetary policy and financial markets.
One of the clearest demonstrations of this disconnect has been evident in recent bond auctions. On May 21, 2025, the U.S. Treasury’s 20-year bond auction experienced some of the weakest demand seen in over a year. The auction yielded 5.05%, but immediately following, yields surged to 5.13%. This was not an isolated incident. A month later, the 30-year bond auction on June 12 raised $22 billion at a yield of around 4.844%, with only lukewarm investor interest. Foreign participation remained subdued, and domestic buyers appeared cautious.
The message is clear: as Treasury issuance escalates to fund new government expenditures, buyers are demanding greater compensation—or simply not participating.
This dynamic is contributing to a growing belief that the U.S. is entering a period of fiscal dominance—a scenario where monetary policy becomes increasingly constrained by the government’s necessity to cheaply finance itself.
Previously, the Federal Reserve could adjust rates based solely on its dual mandate of inflation and employment. Presently, that autonomy is being tested. With deficits projected to surpass $2 trillion annually even before the full implementation of Trump’s bill, and interest expenses threatening to consume a significant portion of federal revenues, the Fed may find itself in a conundrum. It is conceivable that bond yields could surge further, financial conditions could tighten, and the Fed could be pressured to intervene—not to combat inflation, but to ensure the government’s ability to continue borrowing.
These strains are not confined to a niche segment of the market. They affect every portfolio. Elevated yields diminish the value of existing bonds while eroding the relative security and usefulness of traditional fixed-income allocations. Furthermore, if the Fed is compelled to reinstate quantitative easing or artificially suppress long-term yields, it could reignite inflationary pressures—just as policymakers are attempting to declare success in achieving price stability.
Therefore, my preference remains towards tangible, finite assets that are shielded from political manipulation and monetary distortions. Gold and silver continue to serve as essential hedges against inflation and systemic risk. Bitcoin, with its fixed supply and decentralized structure, offers a digital alternative to fiat currencies weighed down by sovereign overreach. Real assets—including productive land, select commodities, and specific types of real estate—provide intrinsic value that is not easily diluted.
What we are witnessing now is a market undergoing a transition. The old paradigm—where the Fed could orchestrate soft landings and the Treasury market would quietly absorb limitless supply—is faltering.
With bond yields defying Fed policy and auctions repeatedly falling short, investors can no longer afford to view U.S. debt as the unquestioned “safe asset.”
The enactment of Trump’s new spending bill underscores the importance of closely monitoring the bond market at this critical juncture. If yields continue to rise or auctions deteriorate further, it could signify that the market is rejecting the notion of boundless fiscal expansion—and that the Treasury market is no longer operating under normal conditions.
Continue reading:
QTR’s Disclaimer: Please refer to my complete legal disclaimer on my About page here. This article solely reflects my personal opinions. Moreover, please note that I am fallible and often make errors, resulting in financial losses. I may possess or transact in any of the entities mentioned in this piece at any given time without prior notice. Posts by contributors and aggregated posts have been meticulously chosen by me, have not been fact-checked, and represent the views of their respective authors. They are either submitted to QTR directly by the author, reprinted under a Creative Commons license with my utmost effort to adhere to the requirements of the license, or with the author’s permission.
This is not an endorsement to buy or sell any stocks or securities, but rather reflects my personal viewpoints. I frequently incur losses on positions I trade or invest in. I may acquire any mentioned entity and divest from any mentioned entity at any time, without prior warning. None of this constitutes a solicitation to trade or invest in securities. I may or may not possess entities I write about and keep an eye on. Sometimes I am bullish without holding positions, sometimes I am bearish and hold positions. Assume that my positions may be the complete opposite of what you presume them to be just in case. If I am long, I could swiftly go short, and vice versa. I will not update my positions. All positions are subject to immediate change as soon as this is published, with or without notice, and at any moment, I may be long, short, or neutral on any position. You are responsible for your own decisions. Do not base your decisions on my blog. I exist on the fringes. The publisher does not guarantee the accuracy or completeness of the information provided on this page. These are not the views of any of my employers, partners, or associates. I made a sincere effort to be transparent about my disclosures, but cannot guarantee their accuracy; I write these posts after consuming a couple of beers at times. I edit my posts after publication due to my impatience and laziness, so if you spot a typo, please check back in thirty minutes. Also, I frequently make mistakes. I mention this twice because it is crucial.
Loading…