Governments in Bondage

Bond vigilantes have more power than presidents and other central planners, and they are no longer shy about using it to restrain governments.

May 27, 2025

Over the past week, Japan has taught us a lot about what can happen when “Big Beautiful Bill Meets Beautiful Bond Market.” Bigger government spending wedded to a bond market where yields are already rising can become a big, ugly marriage.

An article on Quoth the Raven by that title says,

GOP opponents of Trump’s new spending bill argue that it adds too much to the national debt and doesn’t include enough spending cuts to balance it out. They’re concerned it could worsen inflation and say the government is trying to take on too much instead of leaving things to the states or private sector. Some also believe the bill is filled with unnecessary items and lacks clear focus. Overall, they see it as fiscally irresponsible and a step away from conservative principles of limited government and careful budgeting.

Principles the New Republicans seem to have left at the altar. I pointed out Big Beautiful Bill’s whale-scale excesses in my weekend Deeper Dive. QTR quotes Republican Rep. Thomas Massey, as did I, and notes,

Massie correctly pointed out that investors continue to demand higher yields on U.S. bonds, signaling a loss of faith in the creditworthiness of the United States.

That loss of faith is the same thing Japan is deeply embroiled in, and it has gotten so out of hand that the news this morning screams with headlines (below) about the panic and about how deeply it is hurting Japanese insurance companies due to the losses they are realizing on all the bonds they hold as investments of their insured’s money.

While Trump talks today about Putin playing with danger in Ukraine, Trump is playing with economic danger that can turn as bad as his tariff wars are making things turn for Japan’s over-indebted economy:

Massie is unique as a Republican because of his willingness to stand up to the MAGA machine and stand on principle. He’s also unique as a member of Congress in the sense that he’s probably one of about a half dozen people—out of the hundreds in Congress—who actually understand the bond market. And his concern early this morning, whether it’s taken seriously by President Trump’s administration or the rest of Congress or not, is warranted.
[US] bonds sold off at the same time risk assets sold off after Liberation Day (they would usually catch a bid in a ‘flight to safety’ selloff). If it feels like the magnetic poles of the bond market have reversed, it could be because they have.

The bond market is acting fragile. That’s not good for the world’s most stable market.

As bonds sell off with risk assets and as yields rise despite the Fed cutting rates, these influential and sizable investing world powers that be are sending the message that things are not OK the way they are going. The rising yield indicates a desire to be compensated more for holding U.S. debt—sending the signal that it is riskier than people think it is—and it also sends a message to our Treasury and the Federal Reserve that the country’s fiscal house is not in order.

Big Beautiful Bill pretends that isn’t so, but the even bigger, brawnier bond market can strong-arm Big Bill in a hurry and show him a thing or two:

No matter what side of the argument you’re on for Trump’s big, beautiful bill, there’s no doubt that the bond market is going to settle this dispute. If the bill passes and bond yields continue to rise, it will continue to tighten the fiscal screws for the United States….
The one solution has always been very simple: spend less while keeping revenue the same, increase revenue while spending the same, or increase revenue and spend less at the same time. One way or another, the deficit has to be addressed—and the time for doing it is right now — not five years from now, not ten years from now, not at any other point in the future.
The bond market knows this and has been sending this signal clearly since early April.

Big Bloated Bill had better listen because something far bigger is ready to hit him.

MAGA supporters can channel all the hate they want at the libertarian Republicans in Congress, just as Republican hardliners can lash out at what they believe to be more irresponsible spending. But the only true adjudication of this debate the country is having is going to come from the bond market.

Do what they want with tariffs and with spending bills, but both impact the Treasuries that are used as money bags for foreign exchange, so the bond market will ultimately rule on how much congress and the president can get away with. You can bully people all you want if you’re the big guy, but you cannot make them like your bonds in order to offer to buy them for the low interest on which your nation has become utterly dependent. And if the Fed buys hoards of bonds to keep yields down during a time of tariff-triggered shortages, the Fed and all the rest of us will find ourselves fighting some serious inflation.

Ultimately, reality trumps Trump. We’ve seen that in how quickly Trump was pressed to reverse himself when he set tariffs soaring a few weeks ago and backed down a day later (twice) because of the risk those high tariffs brought to the US bond market and particularly the US credit rating and to stocks all at the same time. Bond yields shot up then came back down as soon as he pulled his extraordinary tariffs. He did the same thing yet again this weekend, announcing on Friday he would raise tariffs on the EU to 50% on June 1, then taking all of that back before the three-day weekend was even over.

Things can turn very quickly when people start to question the stability of your mountainous national debt and start demanding higher interest if they are going to continue to fund you:

Right now, Japan is facing what might be its most severe economic crisis since World War II. Angry protesters are gathering outside government buildings in Tokyo, shouting “We are not your ATM!” Rice – the cornerstone of Japanese culture – has disappeared from supermarket shelves…. And in an unprecedented move that sent shockwaves through global markets, Prime Minister Shigeru Ishiba just publicly admitted that Japan’s financial situation is “worse than Greece’s.”

To be sure, Japan’s debt situation was already worse than ours and got exacerbated by the Trump Tariff Wars. It could fight back in those wars by threatening to dump its vast holdings in US Treasuries on the market, but actually doing so would come at a high cost to Japan, too, raising the value of the yen, so hurting its exports even more, and crashing the dollar value of its treasuries as it drives interest on US debt way up. They hold over a trillion dollars in US Treasuries, so it’s a very big weapon to wield.

There is a reason they call this the “nuclear option” in the trade war. You have to be MAD to do it because it’s Mutually Assured Destruction. So, Japan is not likely to do it, but it is a big red button they could push that would immediately drive up US credit costs and diminish US credit ratings even more than they have already gone down by shoving the supply of US Treasuries sky-high … and US debt interest along with that supply.

(One article below describes this red button and the reasons Japan probably won’t use it, even as Trump’s Tariff War makes their own situation desperate; but Big Bodacious Bill can take US interest rates up even if Japan choses not to use its nuclear option.)