Treasury Yields Spike as DC’s Budget Circus Stumbles Into Another Act

Washington’s fiscal follies send bond markets scrambling—because nothing says ’stable store of value’ like politicians playing chicken with the debt ceiling.

Investors pile into crypto hedges as traditional finance wobbles. Who needs yield curves when you’ve got volatility to spare?

Moody’s downgrade rattles bonds while Trump’s tax bill stalls

Last Friday, Moody’s cut the US credit rating to the second-highest tier, matching what other rating agencies already had. But it wasn’t just the downgrade that caused the sell-off. It was the reasoning behind it.

Moody’s pointed directly at the expanding federal deficit and the rising cost of servicing government debt. The impact was immediate. The 30-year Treasury shot above 5% on Monday, the second major spike in just a month.

Now, all eyes are on Trump’s latest tax plan. Many Republicans are refusing to back it unless it includes bigger deductions for state and local taxes. The disagreement has stalled progress and raised fresh questions about whether the bill can actually pass. If it does, investors fear the cost will push the deficit even higher.

Analysts at Deutsche Bank said in a note, “When it comes to the near term, all eyes are now on the tax bill that the TRUMP administration is seeking to pass through Congress, as the final agreement will go a long way to determining how big the US deficit becomes in the years ahead.”

Adding to the drama, RAY Dalio, billionaire founder of Bridgewater Associates, warned Monday that Moody’s downgrade may underplay the real threat. In a post on X, Dalio wrote:

“You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt.” Ray went on to say:

“They don’t include the greater risk that the countries in debt will print money to pay their debts thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting.”

Stock futures drop as yields test key levels again

Markets didn’t take the news well. Dow Jones futures dropped 337 points, or 0.8%, while futures tied to the S&P 500 and the Nasdaq-100 each slid by 0.6%. Traders clearly weren’t thrilled by another jump in Treasury yields, especially after such a shaky few days.

By Wednesday, the 10-year Treasury yield was trading well above 4.53%, and the 30-year moved firmly past the 5% line again. Those levels had already been broken earlier in the week, right after Moody’s announced its downgrade late Friday.

Even with all this, Republican lawmakers in Washington are still trying to finalize the bill. The plan is supposed to lower taxes, but the internal bickering over deductions continues to slow everything down. 

Traders are worried that if the measure passes without cuts elsewhere, it will deepen the deficit—exactly what bond markets don’t want to hear.

The drop in stock futures came after an ugly trading session on Tuesday. The S&P 500 ended a six-day winning streak. The Nasdaq Composite fell for the first time in three days. The Dow lost over 100 points, cutting short its own three-day rise.

Despite the pullback, all three major indexes remain above their April 2 levels—when Trump imposed his new import tax policy. That rollout had triggered the rally, lifting the S&P 500 to positive territory for the year.

Before that, the index had dipped into bear market territory, falling nearly 20% from its highs. That bounce, however, doesn’t seem as secure as it did just days ago.

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