Higher Rates, Steeper Curve
The U.S. government may be approaching the point where its debt habit starts to carry real market consequences — not with a dramatic crash, but with a yield curve that's getting uncomfortably steep at the long end and a debt auction that went over like a lead balloon.
Let's Break it Down
Last week, demand for 20-year Treasuries was notably underwhelming. Investors, who’ve been willing enablers of the U.S. fiscal sprawl for years, are starting to tap the brakes. And they’re doing it in the language that make it harder to ignore: higher yields. The 10-year Treasury yield spiked and the 30-year Treasury yield nudged above 5% again, to levels that signal more than just mild discomfort.
"In the early morning hours of April 9, Treasury yields surged as Trump’s steep retaliatory tariffs — the highest in more than a century — went into effect."" -Bloomberg
Because when bond investors start demanding higher returns to lend the government money, it's not just an abstract number. It’s a signal that risk, specifically fiscal risk, is being repriced. That means higher interest payments for the Treasury, more crowding out of private investment, and tighter conditions for borrowers across the economy. You like your mortgage rates under 7%? So does everyone else.
The Yield Curve: Not Inverted, but Nervous
On CMV’s yield curve model, we’ve spent a fair amount of time tracking the flattening and inversion patterns that tend to foreshadow recessions. While the curve has been on a normalization path lately, longer-term rates rising this sharply while shorter-term ones stay anchored is not a healthy sign. It suggests that inflation fears aren’t the only thing pushing yields — fiscal sustainability is elbowing into the picture. In plain terms: investors are looking at trillion-dollar deficits and asking, “How exactly do you plan to pay us back?”
Economic Policy Uncertainty: Off the Charts, Literally
Now layer in the political backdrop. The Economic Policy Uncertainty Index remains elevated to unprecedented levels, which is no surprise to anyone watching the sausage-making on Capitol Hill. And the recent tax-and-spend compromise — which somehow manages to increase both revenue cuts and spending — only underscores the persistent tensions at the heart of budget negotiations.
Moody’s recent downgrade of the US debt credit rating (formerly the literal definition of "risk free") makes it a clean sweep: all three major credit agencies have now said this is not okay. And they're not wrong. The U.S. is running deficits north of 6% of GDP, outpacing GDP growth at a time of low unemployment and stable growth. That kind of fiscal trajectory is usually reserved for wartime economies or deep recessions. Instead, we’re getting it during what should be a period of consolidation — and markets are starting to notice.
Bond Vigilantes: Back from the Dead?
For years, the so-called “bond vigilantes” — investors who push back against irresponsible fiscal policy by demanding higher yields — were declared extinct. But as yields climb and auctions stumble, you have to wonder if they're simply back from sabbatical.
Yes, the U.S. still has massive structural advantages: reserve currency status, a deep and liquid market, a dynamic economy. But even those strengths have limits. (As Moody’s says", "While we recognize the U.S.'s significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics."") And now, with rising rates and the dollar starting to slip, those advantages are looking a lot less bulletproof. At some point, even the most patient lender wants a better deal or clearer fiscal discipline. Right now, they’re getting neither.
What Now?
It’s worth keeping an eye on the interest rates. If the deficit balloons further, longer term interest rates will keep hiking up, increasing borrowing costs for companies and reducing the present value of future earnings — a double whammy for equity valuations.