The U.S. bond market sets the risk-free rate against which every other asset is measured, which is why Ray Dalio calls it “the backbone of all markets.” But this week it’s also become the biggest story in global finance.
Long-term Treasury yields have spiked to their highest levels in decades, with the 10-year over 4.6% and the 30-year topping 5.1%. The bond sell-off has sent mortgage rates climbing again, spooked stock markets, and inspired a familiar safe-haven pattern with gold up, the dollar down, and Bitcoin surging to $111,000.
A deepening supply-demand imbalance in Treasuries appears to be driving the selloff — plus a major fiscal accelerant in the form of a Trump-backed tax bill. The House passed the bill early Thursday. It is is projected to increase the federal deficit by hundreds of billions over the next decade.
Markets essentially took one look at that math and hit “sell.”
That reaction was compounded by a poorly received 20-year Treasury auction on Wednesday. Though the auction wasn’t a catastrophe, demand was weak enough to reinforce traders’ fears that there may simply be too much supply hitting the market too fast, with not enough buyers. The yield on the 10-year spiked nearly 10 basis points by the afternoon.
Mortgage rates surged to 7.08% this week, the highest level in more than three months, per Mortgage News Daily. That means housing, already unaffordable for millions of Americans, just got even less affordable.
Adding to the turmoil, President Donald Trump said in a Truth Social post late Wednesday that he’s seriously considering re-privatizing Fannie Mae (FNMA) and Freddie Mac (FMCC). While details remain vague, the move would almost certainly strip the agencies of their quasi-sovereign status, prompting a credit downgrade and likely pushing mortgage rates even higher. At a time when housing affordability is already straining household finances, that threat isn’t helping inspire confidence.
Rising long-term rates hurt not only housing, but consumer borrowing, and stock valuations, too. But if the Fed steps in to buy bonds — in order to suppress yields — that would effectively mean printing money and risking inflation.
In a video released Wednesday, billionaire famed investor and author Ray Dalio described this exact dilemma: “When there is a breakdown in the supply-demand picture… that raises interest rates and it puts the Federal Reserve in a bind… between allowing interest rates to rise and hurt the economy, or coming in and printing money… and that produces inflationary pressures.”
The takeaway? Either path comes at a potentially steep cost. In the meantime, it’s clear that Washington just made the Fed’s job harder. Investors are demanding higher returns for holding U.S. debt, and there’s no obvious marginal buyer left.
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