The U.S. Debt Spiral and Its Yield Impact
Trump’s latest legislative push, described as the “big, beautiful bill,” promises deep tax cuts and aggressive government spending. However, this comes at a cost. According to the Congressional Budget Office (CBO), the proposed measures would balloon U.S. debt by $3.3 trillion, exacerbating already high deficit levels. The U.S. national debt now stands near $36 trillion, with around $29 trillion held by the public.
This surging debt has already triggered a Moody’s credit downgrade in May, citing structural fiscal imbalances. Notably, foreign investors — long-time buyers of U.S. debt — are now turning cautious. The U.S. Treasury International Capital (TIC) data shows a net $14.2 billion outflow from U.S. bonds and banking assets in April, coinciding with Trump’s declaration of protectionist tariffs under the so-called “Liberation Day” policies.
This uncertainty has caused notable volatility in Treasury yields, especially on the 10-year note. Yields rose as high as 4.629% in May, retreating only slightly to the 4.2% range — highlighting heightened risk premiums demanded by investors. The yield curve is expected to steepen further as longer-dated securities bear the brunt of deficit concerns.
Tariffs, Inflation, and the Dollar Disconnect
Tariffs are inherently inflationary. By making imports more expensive, they push up prices across the supply chain. If enacted at the scale suggested by Trump’s proposals, these tariffs could further stoke U.S. inflation, forcing bond yields higher as investors demand greater returns to offset future price erosion.
Interestingly, there’s now a visible divergence between U.S. Treasury yields and the Dollar Index, signalling a crisis of confidence. Typically, rising yields should bolster the dollar by attracting capital flows. However, persistent fiscal concerns and political unpredictability are eroding the traditional safe-haven status of both the dollar and Treasuries.
Spillover Effects: India’s Bond Market Response
The global repricing of bond yields is also reverberating in emerging markets like India. U.S. Treasury yields serve as a global benchmark, and any sustained spike triggers risk reallocation. This could reduce foreign portfolio flows into Indian government and corporate bonds, putting pressure on the rupee and nudging domestic bond yields upward.
However, India has its own internal dynamics. Growth concerns and contained inflation expectations may prompt the RBI to cut interest rates by up to 50 basis points in 2025, according to Emkay Wealth’s Dr. Joseph Thomas. This could act as a partial offset to rising global yields, particularly if the RBI prioritizes growth support.
Foreign Exposure: A Tectonic Shift
Japan, traditionally the largest holder of U.S. Treasuries at $1.13 trillion, and the U.K., with $807.7 billion, have already begun reassessing their exposure. With Treasury bonds no longer offering the comfort of fiscal prudence, diversification into other geographies and asset classes is gaining momentum.
India, with a growing economy and relatively stable fiscal management, stands to benefit from some of these diversions — especially if the global hunt for yield intensifies.
Conclusion: End of the U.S. Bond Safe Haven Era?
Trump’s fiscal populism, marked by high spending and high tariffs, is unsettling the world’s largest debt market. U.S. Treasuries — once seen as bulletproof — are now vulnerable to inflation risk, political shocks, and global divestment.
For India and other emerging markets, this shift presents both challenges and opportunities. While rising U.S. yields may drain liquidity from developing economies, it also creates space for domestic rate cuts and foreign inflows — provided macro fundamentals remain sound.
In essence, bond markets globally are no longer driven solely by economic data — they are now responding to politics as much as to policy. Investors should brace for more volatility ahead.
(Source: Reuters and Other Agencies)
