The number of Americans filing for new unemployment claims fell to its lowest level in over half a century. Core consumer price index inflation, the Federal Reserve’s preferred inflation gauge, fell back to its lowest level since March, defying expectations, and the International Monetary Fund has upgraded its expectations of the country’s economic growth for this year to 2.3%.
And yet on Thursday, the bond market went ballistic.
The yield on the 30-year Treasury, the measure of investor confidence in America’s ability to pay back its $38 trillion national debt in the long term, skyrocketed to 5.17%, its highest level in 20 years. The yield on the benchmark 10-year Treasury, which determines both government financing and consumer borrowing costs from mortgages to auto loans, soared past 4.7%, the highest level of Donald Trump’s second term as president. The bond market blow-up came as American oil futures jumped almost 6% and the Dow Jones Industrial Average sank 600 points.
The obvious scapegoat for the market’s movement is our military campaign in Iran, which Trump is reportedly ready to escalate with a spate of new strikes after the collapse of a ceasefire that was only tenuous at best.
But even if Iran is the proximate cause for investor expectation that oil supply chains in the Middle East are about to come to a deadlock again, it doesn’t fully explain why Treasury yields, which have held relatively stable for over a week after fighting resumed on July 8, have only now gone haywire.
Rather, the bond vigilantes have an all-of-the-above assessment of the U.S. government’s performance, and not in a particularly good way. As the Federal Open Markets Committee heads back to its second meeting with Kevin Warsh as Fed chairman, bond investors may believe that the central bank is committed to bringing inflation back to its 2% maximum target — and that statement still has a giant asterisk over it — but they do not have confidence that either the president or Congress cares to help.
Our national debt is now as large as our entire annual economic output, a 100% debt-to-GDP ratio that we haven’t seen since World War II. And while the Democratic Party continues to nominate socialist candidates who loudly tout new multitrillion-dollar spending without actual taxes capable of paying for it, Trump’s tariffs have transformed from the administration’s greatest tool of deficit reduction into a net-negative.
Trump’s tariffs, the Department of Government Efficiency, and his deregulatory agenda helped shrink the federal budget deficit by 4% in fiscal 2025, and in the first half of fiscal 2026, the deficit had decreased another 11%. But after the Supreme Court overturned the bulk of Trump’s tariff power, domestic importers have taken the White House to court and largely won. The Treasury has issued $70 billion of tariff refunds in the last two months. On its own, that amount wouldn’t prove catastrophic for investor confidence.
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But absent entitlement reform, the Trump administration has only two ways to prevent the deficit from exploding: generate faster economic growth or raise revenue through tariffs without allowing those tariffs to impede that growth, or pursue some combination of the two. The combination was basically working, especially as Trump’s One Big Beautiful Bill Act took effect, leading to a 7% increase in individual income taxes as personal earnings went up. But with tariffs once again widening the Treasury’s shortfall, automatic spending increases can no longer be papered over. Entitlement outlays are up 7% over the past year, including a 10% increase in Medicaid spending, and bond investors will not ignore the deterioration.
You can easily blame Iran for the hike in gas prices, and Trump’s equivocation over the war surely hasn’t instilled confidence in markets that the administration has a solid long-term plan to end the war. But the whole picture motivating the market’s movement is dominated by the perception that the federal government, from the Hill to the White House, is mismanaging things here at home.