As Tariffs and Supply Test Demand After the Tax and Spending Bill, The Treasury Routing Grows

U.S. government bonds and stocks both saw notable declines on Monday following President Donald Trump’s announcement of new tariff hikes. The president declared that starting August 1, imports from Japan and South Korea would face a 25% tariff, while products from Myanmar and Laos would be taxed at a steeper 40% rate. These rates represent a significant jump from the current 10% baseline that’s been in place since April.

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This latest move rekindles trade tensions after a brief hiatus. A few months ago, markets experienced a sharp selloff when Trump introduced his so-called “liberation day” tariffs. Although those tariffs were temporarily suspended, their return now has sparked renewed investor anxiety.

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Tom di Galoma, managing director at Mischler Financial Group, noted a shift in market behavior. "It used to be that when stocks sold off, bond yields would fall due to a flight to safety," he explained in a phone interview. "But now, that relationship seems to be breaking down—bond yields are climbing even as equities lose steam."

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On Monday, the Dow Jones Industrial Average dropped by 0.9% to close at 44,345, marking its sharpest one-day drop in about three weeks, according to Dow Jones Market Data. The S&P 500 also slid 0.8%, while the Nasdaq Composite declined 0.9%. Despite these losses, all three indexes remain within 1.5% of their all-time highs, suggesting that investor confidence hasn’t completely unraveled.

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Treasury markets mirrored the downward momentum. The yield on the 10-year Treasury note jumped 5.5 basis points to reach 4.394%, while the 30-year bond yield climbed 7.2 basis points to 4.929%. It’s important to note that bond yields move in the opposite direction of prices, so these higher yields indicate a drop in bond prices.

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This marks the fourth consecutive trading session in which yields on longer-term Treasurys have risen. The 30-year yield is now edging closer to its May 21 high of 5.089%. The uptrend suggests that investors are demanding greater returns to compensate for uncertainties around tariffs, inflationary pressures, and rising concerns over the U.S. fiscal outlook, including its growing debt and deficit.

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Foreign investors continue to play a significant role in the U.S. Treasury market. According to Oxford Economics, which analyzed data from the Financial Accounts of the U.S., overseas investors held a record $9 trillion in U.S. Treasury securities in the first quarter of the year—representing about 32% of the total market. Among foreign holders, the eurozone leads the way, followed by Japan, China, and the United Kingdom.

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John Madziyire, head of U.S. Treasurys and TIPS at Vanguard, attributed Monday’s bond market selloff to the stronger-than-expected U.S. jobs report released last Thursday. “Investors are still processing that data,” he said, referring to the June report that showed job creation exceeding forecasts, even though it also indicated that finding jobs remains challenging.

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Madziyire also pointed to the upcoming influx of new government debt. This week, the Treasury plans to issue a sizable batch of bonds: $58 billion in 3-year notes on Tuesday, $39 billion in 10-year notes on Wednesday, and $22 billion in 30-year bonds on Thursday. He noted that although demand for longer-duration Treasurys had improved in recent auctions—especially since April’s wave of “sell America” sentiment—these upcoming auctions are still pivotal.

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“These long-end auctions are vital,” Madziyire emphasized. “Not only do they serve to finance government operations, but they also offer insight into investor sentiment, especially in the wake of the Republican-led tax-and-spending package becoming law.”

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The recent GOP bill includes permanent corporate tax cuts, temporary tax relief for some tipped workers, and significant reductions to social programs like Medicaid. However, it also raises the debt ceiling by $5 trillion and is projected to increase the U.S. deficit by an estimated $3.4 trillion over the next ten years—raising alarm among some market participants.

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Despite the market turbulence, Robert Pavlik, senior portfolio manager at Dakota Wealth Management, urged caution and a long-term perspective. While he acknowledged that investors are keeping an eye on the renewed tariff threats, he suggested they may see them as negotiating tactics rather than immediate policy shifts.

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“It’s still very uncertain,” Pavlik said. “But I’m not rushing to overhaul my investment portfolio because of this. It feels more like part of the broader back-and-forth we’ve been seeing from this administration.”

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