US bond yields are rising amid concerns about inflation and monetary policy, putting significant pressure on the US’s already tight fiscal position. If President Donald Trump fails to secure sufficient revenue from retaliatory tariffs and a surge in inflationary pressures is not averted, the world’s largest economy risks a sudden death.
On Tuesday (22/7), US Treasury yields rose after the release of June inflation data. The Consumer Price Index (CPI) rose 0.3% month-on-month, with annual inflation at 2.7%. Core inflation, which excludes food and fuel, rose 0.2% month-on-month and 2.9% year-on-year. The data significantly reduces expectations that the US Federal Reserve (Fed) will cut interest rates at this month’s meeting – despite Donald Trump’s suffocating pressure on Chairman Jerome Powell.
As a result, bond investors demanded higher yields on both short- and long-term Treasury bonds.
The 10-year yield rose 6 basis points to 4.485%, while the 30-year yield rose 4 basis points to 5.015%. The 2-year yield rose nearly 6 basis points to 3.954%.
Despite the recent rise, yields on 10-year and 30-year bonds remain well below their historic highs in 1981, when the 10-year reached 15.82% and the 30-year 15.19% – but that doesn’t mean there aren’t signs of alarm.
The Bond Market Punishers
The global bond market is larger than the stock market, with a total value of more than $140 trillion. The U.S. Treasury market is worth more than $51 trillion, making it the largest in the world.
Investors closely monitor U.S. bond yields because they are key indicators of the direction of the global economy.
Rising yields usually indicate greater confidence in growth prospects, but they can also mean increased inflation expectations. Conversely, low yields can signal reduced growth expectations or low inflation.
During times of economic uncertainty or quantitative easing by the Fed, yields fall (i.e. a country borrows more cheaply) as investors turn to safe havens, such as government bonds.
Political Influence on the Bond Market
Bond vigilantes are investors who sell government bonds in response to policies they consider inflationary or fiscally irresponsible, thereby increasing the cost of borrowing for governments. The term was coined by economist Ed Yardeni in the 1980s. Historical examples of this practice include:
The “Great Bond Slump” in the early 1990s under President Clinton.
The sharp rise in yields after Trump’s election in 2024.
The dramatic bond crisis in Britain in 2022, under Prime Minister Liz Truss, which led to the collapse of the currency and her resignation.
Similarly, in the US, Donald Trump’s announcement of tariffs on “Liberation Day” (April 2, 2025) led to massive sales of US bonds — even from China and Japan, the largest holders of US debt.
Risks to the US economy and global stability
Analysts warn that Donald Trump’s policies — retaliatory/punitive tariffs, tax cuts and pressure on the Fed — could lead to a fiscal crisis.
Markets are already reacting nervously, but without reaching critical levels yet. The legislation signed on July 4, 2025 (“Big Beautiful Bill”) is expected to reduce tax revenues by $5 trillion by 2034, while according to the Committee for a Responsible Federal Budget, the debt-to-GDP ratio could exceed 140%.
If Trump fires Fed Chairman Jerome Powell, as he has suggested, it could trigger a massive capital flight, a collapse in the dollar, and a sharp rise in yields, creating a vicious cycle:
Falling trust in institutions
Rising inflation expectations
Massive bond sell-off
Pressure on stocks and the banking system
The “bond watchdogs” are back, putting pressure on governments with the power of the markets. The Liz Truss episode is typical of what can happen when the market loses confidence. If the US continues on a path of increasing debt and decreasing revenues, it could face a similar crisis. In such an event, the only safe havens left are precious metals and commodities.
Why does divestment from U.S. debt matter?
The U.S. Treasury relies heavily on foreign capital to finance the federal government’s massive (about $2 trillion) deficits. So if foreigners’ appetite for buying U.S. government debt wanes—at a time when federal deficits are skyrocketing—where will the Treasury get the money?
There are essentially two answers:
Either (1) the Federal Reserve will “print” money,
or (2) domestic investors within the U.S. economy will buy government bonds and finance the deficit. But both options come at significant costs.
Scenario 1: The Fed Buys Bonds
In order for the Federal Reserve to buy U.S. government bonds (and essentially finance the government’s annual budget deficit), the Fed must first expand the money supply. We often refer to this as “printing money,” even though it all happens electronically.
The Fed calls it “quantitative easing,” but it’s the same thing.
The consequence of QE is inflation… high inflation—that is, a spike in the prices of goods and services. Think about it—during the pandemic, the Fed’s QE created about $5 trillion in new money… resulting in 9% inflation.
Creating enough money to finance federal budget deficits over the next decade could lead to the Fed being forced to print $15+ trillion. So, it is likely that this will lead to a massive inflationary crisis.
Scenario 2: Financing Government Deficits from the U.S. Economy
American investors, i.e. banks, funds, corporate trusts, etc., could also buy more U.S. government bonds to offset falling foreign demand. However, this capital comes at a large opportunity cost.
Every private capital entering the Treasury bond market means less money available to buy stocks, finance venture capital, or finance mortgages.
The net result is lower stock prices, higher mortgage rates, and more innovation.
Why is China the First to Dump US Treasuries?
After the sanctions against Russia, which included freezing their holdings of Treasury bonds, other countries were spooked – especially China. China is likely afraid of becoming the next target of the use of the financial system as a geopolitical weapon. So China is hedging: they are selling US Treasuries and buying literally metric tons of physical gold – driving gold prices to record levels.
The dwindling foreign appetite for US debt is a glaring red flag. It signals waning confidence in the US fiscal credibility and could lead to capital pressures at home – or a nasty inflationary spiral if the Fed fills the gap. Many Americans may cheer the idea of being less dependent on Chinese or other foreign money. But in reality, foreign investment in government debt is the closest thing to a “free lunch” the economy has ever come to.
It means foreigners are financing federal deficits, which means less inflation at home, and it allows private capital to invest directly in the U.S. economy.
The plan to create a market for U.S. debt through stablecoins, bring in tariff revenue, and curb inflationary pressures will determine the outcome of President Donald Trump’s bid to regain economic sovereignty.
