The US budget deficit is the story markets are fixated on this week, with panicked bond investors sending yields spiraling higher and spooking the stock market.
The bond market is responding to the possibility that the GOP budget bill, which passed in a vote in the House of Representatives on Thursday morning, could add trillions to America’s budget deficit.
The Treasury sell-off continued on Thursday after the bill was sent to the Senate, with the 30-year bond yield edging past 5.1%. The 10-year US Treasury yield rose past 4.6%.
So, why are investors so worried about the deficit?
There are three things top of mind for the so-called bond vigilantes.
1. Rising debt and deficits near a “tipping point”
The government has been growing the deficit — or the difference between what it spends and what it collects in revenue — for years. The US hasn’t had a balanced budget since around the turn of the century. It ended its last fiscal year with a $1.8 trillion deficit.
Moreover, the US has been borrowing rapidly to fund high deficit spending. According to the latest data from the Treasury Department, the total federal debt balance has climbed to a record $36.2 trillion.
The GOP’s “big beautiful bill” will eat into government revenue by slashing taxes. There are a range of estimates, but the version of the bill that advanced to the Senate this week could add up to $4 trillion to the deficit in the coming decade, according to a projection from the Tax Foundation.
This means even more borrowing will be needed to fund basic government functions, such as running social programs and the military.
According to Michael Brown, a senior research strategist at Pepperstone, investors are concerned that debt levels could be reaching unsustainable levels.
In the 2024 fiscal year, the government paid $881 billion on debt interest payments, according to the Congressional Budget Office. By 2035, total interest payments are expected to rise to $1.7 trillion a year, per the CBO’s projections.
“I think the issue is more that starting to worry about whether we’re getting close to or whether we are at a sort of tipping point,” Brown told Business Insider. “It is not a new phenomenon. I think the problem is we’re all now starting to wake up to the fact that nobody, certainly in the US, actually wants to do anything to get things under control.”
2. Borrowing weighs on growth
With higher deficits comes even more debt.
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Debt is inflationary and could raise prices for Americans. A projection from the Yale Budget Lab estimates that a 1% increase in the US debt balance relative to GDP—which would roughly be the impact of extending Trump’s 2017 tax cuts—could erode the purchasing power of households by $300 to $1,250 over the next five years.
Government spending is also a significant driver of economic activity, and the more it spends on servicing its debt, the less money it has for other things.
“There’s a finite amount of cash. It can be used on better things than paying down the interest bill,” Brown said.
This is particularly the case in an era of higher interest rates. After over a decade of historically low rates, borrowing costs are up again. The US spent more servicing its debt than it did on the military for the first time last year, with debt service amounting to 3.1% of GDP growth, according to data from the Federal Reserve.
“These factors interrelate, of course: the size of the national debt means higher borrowing costs have a more material impact on the US fiscal position,” analysts at Impax Asset Management wrote this month.
3. A worse fiscal position could lead to lower investor confidence
All of the borrowing and deficit spending could lead to less confidence that the US is the safest market for investors’ money.
“Governments that run sustained deficits rely on creditors’ confidence that debts will be serviced and repaid. Large structural deficits and rising national debts increase the risk of default,” Apex said, though it added that a default for the US is still unlikely.
Brown said the government could be forced to offer higher yields if investors ever appeared hesitant to keep buying Treasurys.
This played out to a degree this week, when an auction of $16 billion 20-year Treasury bonds was met with weaker-than-expected demand and sold at the highest yield since 2020.
Brown thinks bond volatility will smooth out in the near term. Given Trump’s focus on the 10-year Treasury yield and his promise to lower borrowing costs for Americans, the tax bill could be amended to make investors more confident in the US, he speculated.
“The market has just got very, very jittery right now over what’s going on in Congress and digesting it, but actually should be okay in two or three months. Things should settle down,” he said.
