When President Donald Trump suddenly backed off his massive “Liberation Day” tariffs in April 2025, he acknowledged his reversal had been driven by one factor in particular: “I was watching the bond market. The bond market is very tricky … People were getting a little queasy.”
Over the past week, the bond market has looked more than a little queasy. The deterioration of arguably the most critical financial asset in the world now risks rippling through the broader U.S. economy in dangerous and unpredictable ways — and possibly right before the 2026 midterm elections.
On Friday, the yield on the 30-year Treasury bond reached a nearly two-decade high of 5.3%, and has only partly come back down since then. The yield on the 10-year Treasury bond spiked above 4.7% — the highest level since the beginning of the Trump administration. It recovered on Monday and Tuesday, but remains near recent highs.
“Five percent is really when things start to break,” said Joseph Brusuelas, principal and chief economist for RSM US LLP, of the 10-year Treasury bond yield. “You don’t know where it’s going to be. But if rates surge, it’s going to cause some problems in those institutions. And then who knows what can go wrong next.”
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The tremors in the bond market represent a stark contrast to the historic run in the stock market. The S&P 500 and Dow Jones industrial average both hit records on Tuesday. The Trump administration has celebrated the rise in equity markets as a sign of the economy’s general health.
But economists and Wall Street analysts generally agree that the risks to small- and medium-sized banks grow substantially if 30-year Treasury bond yields rise above 6% and 10-year Treasury bond yields rise above 5%. They say both numbers are worryingly within reach.
The last sustained period of high interest rates led to the failure of Silicon Valley Bank, precipitating a bailout from the Biden administration to prevent a broader financial contagion from dragging down the U.S. economy.
The $40 trillion in outstanding debt issued by the federal government is a pillar of the global economy. The 10-year U.S. Treasury bond is the benchmark for mortgage rates, housing loans, credit card payments and a host of other critical functions, in addition to serving as the reserves for countries around the world. Already high borrowing costs have made it more expensive to take out a mortgage, buy a car or start a business, and have also driven up the costs to taxpayers of financing the debt.
Trump’s been feeling the squeeze: his approval rating on the economy dropped from 38% to 30% from March to April, according to an Associated Press poll. Democrats’ approval ratings generally are also abysmal, but they should benefit if voters take out their anger over the economy on the president — especially if new problems emerge in the next three months.
On Wednesday morning, the Treasury Department will announce plans for later Treasury auctions to borrow an additional $739 billion to fulfill government payments between July and September. This will be a key gauge of investors’ appetite for buying more U.S. debt despite the recent concerns. Any shortage of investor appetite could trigger another sharp rise in bond yields.
“Between now and the midterms, probably the biggest risks are some kind of failed Treasury auction,” said Adam Posen, president of the Peterson Institute for International Economics, a centrist think tank. “It’s like so many other things where people adapt and reset expectations because the world didn’t end last time, so I won’t overreact this time. That’s only true until it isn’t.”
Trump’s declared “Liberation Day” tariffs triggered a financial market panic in which investors dumped billions in U.S. treasuries. Faced with the broad economic fallout of the bond market crisis, Trump suspended most of his import duties at the last moment. Markets recovered with relative ease.
The spike this time was less sudden and has gotten less attention. But it may also be harder to resolve.
Federal Reserve Chair Kevin Warsh last week fueled doubts about the central bank’s willingness to hike interest rates to fight inflation. This drove investors out of long-term bonds, because out-of-control inflation reduces the value of the dollar over time. Warsh has been under pressure from Trump not to raise interest rates because they slow down economic growth.
Treasury Secretary Scott Bessent on Tuesday expressed optimism that prices are generally heading in the right direction, which would put less pressure on Warsh to raise interest rates. But other economists have been skeptical, noting that inflation remains well above the Federal Reserve’s 2% target.
“What gives me the confidence is that the underlying numbers — they are very tame,” Bessent said on CNBC. “I think we’re going to continue to see that.”
Even if Warsh can preserve the central bank’s inflation-fighting credibility, there may be other threats to the bond market that could prove harder to untangle than calling off the “Liberation Day” tariffs.
Japan is the second-largest holder of U.S. treasuries in the world, with $1.1 trillion in holdings. But Japan has faced a severe currency crisis of its own, and moved to sell treasuries to prop up the value of the yen, in turn putting further pressure on U.S. bonds. Bessent stepped in this week to prop up the yen, and while that effort has looked successful thus far it may prove a temporary salve.
An escalation in hostilities with Iran could also lead to another surge in bond yields. Chris Rupkey, chief economist at FWD Bonds, said “the big swings” in oil prices tied to the resumption of fighting have been perhaps an even greater cause of volatility, as investors rush to beat the market. Bonds calmed after Trump’s latest comments over the weekend that a deal with Iran was within reach, but then the president has also threatened the country with “decapitation” if it did not accept an agreement.
Even without the war or spillover from Japan, analysts say high yields will persist as long as the federal government continues to run annual deficits that are close to 6% of the national economy. While large deficits are unlikely to cause a market crisis, particularly in the short term, the fiscal imbalance still drives higher rates that raise borrowing costs for the government and therefore U.S. consumers.
“My view of the most likely scenario is that we have no acute crisis, but rates stay high in a way that is still a really big problem — the cost of homeownership continues to be a disaster, and consumers face high interest rates,” said Tobin Marcus, the head of U.S. policy and research at Wolfe Research and a former Biden economic official. “It’s a little hard to tell a story about a major catalyst where something big breaks, but it’s definitely possible.”
The odds of a deal to lower the deficit are vanishingly small, and that means the pressure will likely fall primarily on the Federal Reserve not to reprise last week’s disaster. If it cannot do so between now and November, the political impact may be felt sooner rather than later.
“If the concerns with the Fed grow, what we see with interest rates will just keep going higher,” said Claudia Sahm, a former economist with the central bank. “And regular people will notice that.”
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