The Bond Market’s Rout Is Bad News for the U.S. Economy


The Bond Market’s Rout Is Bad News for the U.S. Economy

Trump and his advisers may not appreciate that the U.S. is a debtor nation and needs to attract foreign capital to fund its massive budget deficits.

By Steven Orlowski, CFP, CNPR

The U.S. bond market is sending a clear signal, and it isn’t good. Yields are rising, prices are falling, and the consequences could ripple across the entire economy. At the center of this growing storm lies a fundamental misunderstanding—one that former President Donald Trump and his economic advisers seem unwilling or unable to acknowledge: the United States is a debtor nation. And debtor nations must attract capital, not repel it.

A Capital-Dependent Nation

Unlike countries that run consistent budget surpluses or maintain current account surpluses, the U.S. lives on borrowed money. With over $34 trillion in national debt and annual deficits now exceeding $1.5 trillion, the U.S. government relies heavily on investors—particularly foreign ones—to buy its Treasury bonds. These purchases finance everything from Social Security payments to military spending. But they’re not made out of charity; they depend on confidence in the U.S. dollar, the rule of law, and above all, a stable return on investment.

When bond prices fall and yields rise, as they have over the past year, it typically means that investors are demanding more compensation for holding U.S. debt. Part of this is inflation-related. Part is driven by the Federal Reserve’s tightening cycle. But part of it—perhaps the most worrisome part—is about risk perception.

The Trump Factor

Donald Trump, now the presumptive Republican nominee for 2024, has floated economic proposals that are raising eyebrows in bond markets. Among them: a return to aggressive tariffs, a lack of commitment to fiscal restraint, and even suggestions that the U.S. might renegotiate its debt obligations. While Trump’s base may cheer his “America First” rhetoric, global capital markets interpret such signals quite differently.

Renegotiating the U.S. debt—or even implying a willingness to do so—undermines the full faith and credit of the United States. So does talk of weaponizing the dollar or politicizing the Federal Reserve. Investors don’t forget such statements, and they don’t have to tolerate them either. They can simply go elsewhere.

A Crowded Field, A Nervous Market

Today, the U.S. is not the only game in town. Other developed nations offer attractive yields with less political noise. In a world where capital flows freely, investors can buy German bunds, Japanese bonds, or even emerging market debt that comes with higher yields and improving credit profiles. If they perceive that U.S. debt carries political risk—especially from populist or unpredictable leadership—they will demand a higher yield or reduce exposure altogether.

That’s exactly what seems to be happening.

In recent months, demand from major foreign holders such as China and Japan has slowed, forcing the U.S. Treasury to rely more heavily on domestic buyers, including money market funds and banks. That’s not sustainable in the long run. A shift away from Treasuries increases borrowing costs not just for the government, but across the entire financial system—impacting mortgage rates, corporate loans, and credit cards.

The Economic Domino Effect

Higher bond yields also put the Fed in a bind. If it cuts rates too soon, it could ignite inflation. If it waits too long, it risks recession. But if yields are rising due to fears about the U.S.’s fiscal path, no amount of rate tinkering will reassure markets. Worse, the resulting increase in interest payments on the national debt adds further strain to the federal budget, creating a vicious cycle.

At some point, this becomes a confidence crisis—and confidence is what holds a reserve currency together.

What Needs to Happen

Restoring market faith requires more than platitudes. It requires policy discipline. Trump and his advisers—should they return to the White House—must recognize that America’s economic dominance rests on credibility. That means respecting institutions, maintaining fiscal sanity, and treating debt obligations as sacrosanct.

It also means understanding that in a globalized financial system, capital is mobile. The U.S. cannot act like a reckless borrower while expecting the world to fund its lifestyle. Sooner or later, the bond market pushes back.

The current rout in Treasuries isn’t just a financial story. It’s a warning.

And Washington—no matter who’s in charge—should be listening.

© 2025 Orlowski Financial Counsel. All rights reserved.

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