Bond Vigilantes Return as 30-Year Yield Hits 5.18%
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- Bank of America declared "bond vigilantes" have returned, with the yield curve steepening rather than flattening as long-term rates lead the charge higher in an atypical reflationary environment
- The 30-year Treasury yield hit 5.18% on Tuesday, its highest level since 2007, after the Treasury sold $25 billion of 30-year bonds at a 5% yield earlier this month—the first time that maturity cleared 5% since 2007 and a stark reversal from mid-February's record 30-year auction demand
- The Committee for a Responsible Federal Budget estimated that if rates remain about 55 basis points above CBO projections, interest costs would grow from $970 billion in 2025 (3.2% of GDP) to $2.5 trillion by 2036 (5.3% of GDP), with debt service consuming 30% of federal revenue
- President Trump told new Fed Chair Kevin Warsh to "do your own thing" at his Friday swearing-in, while Fed Governor Chris Waller vowed to hike rates if long-term inflation expectations become untethered
- Treasury Secretary Scott Bessent called the current energy shock a "transient" blip, predicting oil prices will come back down in six to nine months as U.S. output hits record highs and other Persian Gulf producers "pump like crazy"
Why it matters: BofA warns that the long end of the curve becomes increasingly sensitive to Fed rate hikes when fiscal dynamics are already deteriorating, because every basis point of higher rates flows directly into $2 trillion of additional debt over the next decade. If the Fed is pressured to hold rates down to contain deficits, inflation expectations risk unanchoring; if it hikes, the interest bill nearly triples. Bond investors are voting with their feet via tepid auctions, but the fiscal trajectory hasn't changed.
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