WASHINGTON – The large-scale tax cuts dubbed the “big, beautiful tax bill” by President Donald Trump have had the opposite effect on bond investors.

Fiscal uncertainty triggered by the tax legislation has disrupted global bond markets, exacerbating investor concerns that had already intensified following Moody’s downgrade of the U.S. credit rating.

The $28 trillion U.S. bond market has experienced significant volatility. The 30-year bond yield surged to its highest level since 2023, surpassing 5%, while 10-year bond yields climbed over 15 basis points within a week, according to CNBC on Friday (23 May).

Investor confidence has not only declined in U.S. bonds—global investors have also started selling off bonds in Japan and Germany.

Japan saw a 40-year bond yield spike to a record 3.689%, while Germany recorded a more than 12 basis point increase in its 30-year bond yields.

These rising yields reflect declining investor interest, ultimately forcing governments to offer higher returns to attract buyers.

Higher U.S. bond yields are expected to strain the Federal Reserve's budget and the broader national financial position. The rate hikes in 2023 and 2024, as part of U.S. quantitative easing, led to the Fed incurring operational losses totaling $192 billion.

Christopher Rupkey, Chief Economist at FWDBONDS, described the tax cuts as a short-term “budget destroyer”, anticipating an increase in U.S. government bond auctions to cover the fiscal deficit.

Steve Blitz, Chief U.S. Economist at GlobalData, warned that tariff policies and domestic industry repatriation efforts could accelerate inflation, eroding the value of fixed-payment bonds.

This policy’s ripple effects have reached local governments.

In a 19 May 2025 research note, Municipal Market Analytics cautioned that the weakening federal credit position could impact local credit ratings, as recently seen with Moody’s downgrade of Maryland.

This means borrowing costs for infrastructure, education, and public services could rise.

Rong Ren Goh of Eastspring Investments noted that fears over deteriorating long-term fiscal outlooks have pushed investors to demand higher risk premiums for long-duration bonds.

Bank of America observed that changes in Japanese institutional investor behaviour, along with tighter monetary policies from the Bank of Japan, have worsened pressures in global bond markets.

Meanwhile, in Europe, re-armament strategies and the end of austerity policies have sparked concerns over structural deficits.

George Saravelos, FX strategy head at Deutsche Bank, warned that Japanese assets’ growing appeal as an alternative could accelerate divestment from U.S. bonds.

Markets now see the “bond vigilante” phenomenon as a serious threat.

The term "bond vigilantes" refers to investors who sell off government bonds en masse as a form of protest against irresponsible fiscal or monetary policies, such as excessive government spending or uncontrolled inflation.

However, Nicholas Colas of DataTrek Research highlighted that this phenomenon is global.

"Rising bond yields are not just a U.S. problem," he wrote in a 22 May research note.

Nonetheless, as Blitz wrote on 21 May, the core issue remains unchanged: “The imbalance between American spending and revenue, as the government refuses to raise taxes or cut its fiscal promises.” (EF/LM)