Don’t Hit the Bond Market Panic Button
Many Wall Street pundits were quick to hit the panic button after Wednesday’s soft 20-year Treasury auction. Yields jumped. Stocks fell. And commentators wasted no time diagnosing a crisis.
James Mackintosh of The Wall Street Journal captured the nattering negativity of the nomenklatura perfectly, likening the bond market to a broken toilet: you only notice it when it overflows.
In his telling—and in the dominant narrative—the auction reflected a loss of confidence in U.S. fiscal policy. Investors are supposedly demanding higher yields because they fear spiraling deficits and a lack of political will to fix them. The dollar’s drop and the spike in long-end yields were cast as a fear trade, a flashing red light of fiscal breakdown.
But the data—and the market’s structure—tell a very different story. What we’re seeing is not panic. It’s repricing. And not because investors are running from Treasurys, but because they are adjusting to a stronger, more resilient economy.
A Normalizing Yield Curve
The best evidence? The yield curve.
After nearly two years of inversion, the spread between the 10-year and 2-year Treasury yields has steepened to +58 basis points. That’s still flatter than the historical norm—typically 100 to 150 basis points during expansions—but it’s a meaningful shift. A panicked market would push the curve steeper and faster. That’s not happening.
This is a measured move, consistent with the idea that recession risk is fading and the Fed may not need to cut rates anytime soon. The curve is no longer screaming “slowdown incoming.” It’s whispering “stability.”
Growth Expectations, Not Fiscal Collapse…
Bank of America’s fixed income team offered a very different interpretation—one largely ignored in the breathless headlines: “Expansionary fiscal policy will impede the Fed’s ability to cut rates, undermining the argument for USTs as a recession hedge.”
That flips the narrative. Long-end yields are rising not because investors are fleeing U.S. debt, but because they’re less worried about a downturn. Fiscal expansion—through tax cuts, tariffs, and investment incentives—is doing its job: keeping growth strong and consumer demand healthy.
In this world, Treasurys aren’t as useful as hedges. Not because the U.S. is weak—but because it’s strong.
…And the Bond Market Isn’t Cratering
The panic narrative has also ignored some basic facts. As Cullen Roche pointed out this morning, intermediate U.S. government bonds—those with maturities around 5.9 years, close to the average maturity of outstanding federal debt—are up 5.8 percent over the past year. The current “drawdown” is a modest 1.9 percent.
“If you only followed bond narratives on this website you’d think the entire bond market was cratering,” Roche noted.
This isn’t a crisis. It’s a mild repositioning after a year of solid gains. Investors aren’t dumping U.S. debt—they’re adjusting to higher growth, firmer inflation expectations, and a Fed that may not be cutting rates any time soon. Treasurys are being repriced for strength, not disorder.
Tariffs and the End of Forced Treasury Demand
There’s another layer the punditocracy is missing: the bond market is beginning to reflect growing confidence that tariffs and trade policy are working. If the U.S. trade deficit shrinks, foreign central banks and sovereign funds will have fewer surplus dollars to recycle into Treasurys.
For decades, the trade deficit created automatic foreign demand for U.S. bonds. That dynamic is shifting. Less foreign Treasury demand might nudge yields higher—but that’s a feature, not a bug. It means America is exporting less of its wealth and financing more of its growth internally.
That’s exactly what trade reform was designed to do.
It’s Not Just Us
What’s happening in Treasurys is happening everywhere. Bond markets across the developed world are seeing long-end yields rise and curves steepen. Japan just saw its 30-year yield jump to a record high after a weak auction—mirroring the U.S. experience. Germany and the UK are seeing similar dynamics.
As Bank of America put it this week, “steepening pressures are pronounced across developed markets,” driven by shrinking central bank balance sheets and fading institutional demand for ultra-long bonds.
This isn’t panic. It’s a global reset. And the U.S., if anything, is ahead of the curve—because growth is stronger and the fiscal engine is still running.
A Note on GOP Fiscal Appetite
To be fair, some investor unease is justified. While no one expected Republicans to raise taxes, there was a reasonable assumption that they would use a return to power to begin unwinding the Biden-era spending surge. So far, that hasn’t happened. The House-passed tax bill adds trillions to the debt with little in the way of offsets.
That’s not ideal. But again, markets are not punishing it. There’s no uncontrolled selloff. No collapse in the dollar. Just a bond market adjusting to a different macro regime: strong fiscal support, tight money, fewer rate cuts, and a more balanced external account.
Wall Street’s pundits may see fear. But the numbers suggest confidence.
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