Trump faces new inflation warning from bond market

WASHINGTON — The world is growing nervous about lending money to President Donald Trump’s administration, triggering rising interest rates that are exacerbating affordability pressures, hampering economic growth and creating a new risk for Republicans in the November midterm elections.

The surge in energy prices triggered by the war in Iran has impacted the price of bonds that help finance the U.S. government. Interest rates on 10-year US Treasuries exceed 4.44%, up from 3.95% before the war began in late February. Average mortgage rates have reached their highest levels in nine months, while auto sales are in free fall.

The challenge is global in scale, as interest rates have risen in many countries as the world adjusts to the prospect of higher inflation, growing questions about the sustainability of public debt and a dramatic increase in investment in artificial intelligence.

Trump tried to assure Americans that he had a plan to reduce the annual budget deficit by about $1.8 trillion. In the past, he has highlighted revenue from customs duties, payments from foreigners for his Gold Card visa, spending cuts by the Department of Government Efficiency and faster economic growth. Last week, he said the fraud task force led by Vice President JD Vance would be key to unlocking massive savings.

“If he does really well, we’ll have a balanced budget without doing anything,” Trump said.

Economists say Trump’s strategies to significantly reduce the deficit are unlikely to produce the promised results.

The cost of servicing the national debt has tripled since 2021 to more than $1 trillion a year, said Jessica Riedl, a budget and tax specialist at the Brookings Institution.

“President Trump signed a tax cut bill that will likely add $5 trillion to deficits over 10 years — and tariffs only offset a small fraction of those costs,” she said. “Budget deficits are still expected to exceed $4 trillion per year within a decade under current policies. »

Deficits are expected to widen over the next decade as Social Security and Medicare costs outpace tax revenues.

The 10-year U.S. Treasury yield climbed as high as 4.67% in mid-May and has since eased as Iran ceasefire negotiations continued — just as rates initially rose in 2025 due to Trump’s “Liberation Day” tariffs, then began falling once Trump backed away from the most extreme increases.

When Kent Smetters, director of the Penn Wharton Budget Model, analyzed the math related to the rise in 30-year Treasury yields, he estimated that 60% of the increase was due to expectations that America would continue its profligate borrowing and that the remaining 40% was related to inflation driven by the Iran war and Trump’s tariffs.

Glenn Hubbard, former chairman of the White House Council of Economic Advisers during the George W. Bush administration, fears that the United States no longer has the same borrowing capacity as before to effectively combat an economic crisis, such as the 2008 crash or the coronavirus pandemic.

“I don’t think we have the space that we had in 2008 or 2020 to deal with it,” said Hubbard, now a professor at Columbia University’s Business School. “Washington doesn’t seem to be full of ideas, good or bad, to solve this problem.”

Rising interest rates give Democratic candidates racing to determine control of the House and Senate a new line of attack at a time when voters are worried about high food and gasoline prices.

In Colorado’s Fifth Congressional District, Democrat Jessica Killin is building on the message that persistent deficits and higher interest rates make it harder to buy or renovate a home, buy a new car or manage credit card debt.

“Things are already expensive,” said Killin, an Army veteran who was a top aide to Doug Emhoff, the former second gentleman. “We can already talk about gas, but the cost of borrowing only makes things worse. »

Joe Reagan, a military veteran who is also running for the Democratic nomination, said in an email that he talks “a lot about fiscal management” in his campaign. “Every dollar spent on interest payments is a dollar that is not invested in infrastructure, education, veteran services or economic growth,” he said.

They are challenging Republican Rep. Jeff Crank in a district their party sees as a potential swing. Killin said the deficit is an example of how “Trump says one thing and does the opposite.”

In his March 2025 speech to Congress, Trump said that “in the near future, I want to do what hasn’t been done in 24 years: balance the federal budget. We’re going to balance it.”

Crank, the outgoing Republican president, did not respond to requests for comment.

The administration says it will gradually reduce budget deficits. As a percentage of the overall economy, last year’s deficit was lower than in 2024, although the decline depends in part on tariff revenues that are subject to refunds after the Supreme Court ruled them illegal.

Treasury Secretary Scott Bessent cited a report last week showing there was as much as $500 billion in fraudulent government spending per year that could be eliminated, “which would significantly reduce the deficit.”

Bessent appears to draw this conclusion from a 2024 Government Accountability Office report that estimated there was between $233 billion and $521 billion in fraudulent spending each year. But these figures partly come from the pandemic period, when the government borrowed heavily to stabilize the economy.

The White House and Treasury did not respond to questions about the source of Bessent’s claims.

Regarding deficits, Bessent told reporters at the White House that the administration was essentially dealt a bad hand by former President Joe Biden, a Democrat. “We inherited the worst budget deficit in history – in history – when we were neither in recession nor at war,” Bessent said.

Bessent previously announced that the administration would work to reduce the annual deficit to 3% of overall U.S. gross domestic product. It’s currently about double that percentage and Bessent did not directly answer a question about the timeline for reaching his goal.

Currently, investors continue to purchase shares of U.S. companies, causing the stock market to rise in value, a sign of confidence in America’s economic potential. But rising interest rates also suggest that investors view the national debt as a vulnerability for the United States.

Financial markets may be able to inflict enough pain by raising rates to force political leaders to address systemic imbalances. Several economists said they expected markets to force the deficit issue ahead of voters.

Hubbard emphasized that the entire bond market system is based on confidence in debt repayment. He noted that the word “credit” is related to a Latin term which is also the root word credo for a system of beliefs.

“That’s what debt is: I believe you will repay me,” Hubbard said. “It works until it doesn’t.”

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