What the bond market needs to watch next

Thu, Apr 17, 2025, 5:45 AM 3 min read

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The bond market may want to keep one eye on a new Trump tax plan likely to be passed this summer that could add trillions to an already bloated US deficit.

"I think on the margin it [a new tax plan] keeps yields higher," Charles Schwab chief fixed income strategist Kathy Jones told me on Yahoo Finance's Opening Bid podcast (video above; listen in below).

Jones has been assessing the bond market for more than 16 years at the likes of Morgan Stanley and, now, Charles Schwab.

Jones explained, "There are sort of three drivers of the Treasury market: typically what is the Fed doing, what's inflation doing, what's the economy doing. The deficit has never factored in a big way, but there is a risk premium embedded in the longer-term bonds, particularly Treasurys, called the term premium. That has expanded recently, and I think that it continues to expand if we pass that kind of a budget deficit bill. I think that term premium will push up longer-term yields."

Read more: What are bonds, and how do you invest in them?

Jones's view is shared by fellow bond market expert Larry McDonald, who said on Opening Bid this week that the bond market is headed for trouble due in part to high deficits.

A tax deal is already taking shape.

US Treasury Secretary Scott Bessent told me this week there is a line of sight into a tax deal.

"So tariffs are getting the majority of publicity now, but we were having very good luck — or very, very good progress, it's not luck because it's been a lot of hard work — on the tax bill," Bessent said. "So the tax bill is moving through the Senate, moving through the House. I think we're going to have some permanence for the 2017 Tax Cuts and Jobs Act probably by Fourth of July. And I think that will give people certainty."

About $4.5 trillion in tax cuts stand to expire as part of the Tax Cuts and Jobs Act of 2017 (TCJA). The expiration is slated for Dec. 31, 2025.

The House recently passed a budget bill that includes trillions of dollars in cuts to taxes and government spending.

The plan would cut taxes by about $5 trillion. It could also add $5.7 trillion to the government's debt, according to news reports.

The bond market has endured several convulsions over the past month due to whipsawing headlines on tariffs, suggesting yields could stay elevated in the near term and bring negative economic consequences like higher borrowing costs.