Beyond Deficits: Why Fiscal Worry Isn't Moving The Bond Market (Yet)

2025-10-07 08:15:00 ET

Soaring U.S. budget deficits were expected to prompt surging bond yields, but the Treasury market has remained strangely calm. Investors are still much more preoccupied with the Federal Reserve’s policy and growth than they are with Washington’s fiscal arithmetic. The latest data made that evident: a lackluster September jobs report caused Treasury yields to fall, as markets began penciling in more aggressive rate cuts rather than higher borrowing costs. ¹ In reality, the 10-year Treasury yield typically follows Fed expectations and inflation trends - not the magnitude of the deficit. We estimate the 10-year yield has about 70% correlation with the expected Fed funds rate, while deficits, which have run at just below 5% of GDP for years, matter little in the short term. ²...

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