The Big, Beautiful Bill Meets the Bond Market
Why LPs, GPs, and Allocators Should Be Watching Fiscal Policy Right Now
In Trump’s telling, the House GOP’s proposed fiscal package is a “Big, Beautiful Bill”, a blend of tax cuts, growth, and American greatness. There’s no shortage of coverage on the politics, the winners and losers, or the 100% bonus depreciation that had real estate GPs high-fiving each other on social media.
But this piece isn’t about politics, nor is it about the proposed tax cuts. It’s about the bond market.
Because the return of bonus depreciation should be the least of your worries. You see, while the political drama is unfolding in the media, the bond market heard one thing loud and clear: bigger deficits ahead. Treasuries sold off, yields spiked, and the term “bond vigilantes” made a comeback.
Fun fact: the term "bond vigilante" was coined by economist Ed Yardeni in the 1980s. It refers to investors who, by selling off bonds, exert pressure on governments to take their concerns about fiscal policy or monetary policy seriously.
On Budget Deficit and Bonds
Here’s a quick and simplified breakdown of how a government runs a budget deficit.
Just like a household that spends more than it earns and racks up debt, a government can spend more than it collects in taxes, running a deficit year after year.
The U.S. covers these shortfalls by issuing Treasury bonds — essentially IOUs sold to investors like banks, pension funds, and foreign governments. To entice buyers, the government has to offer interest. The rate it pays depends on market confidence: if investors see rising fiscal risk, they’ll demand higher yields. This is important.
And just like a household borrowing to fund spending, the government’s debt load can grow rapidly. More debt means more interest payments, which in turn deepen the deficit.
The 10-year Treasury bond is a key benchmark for long-term economic confidence. Its “real” (inflation-adjusted) yield reflects investor expectations about growth and fiscal health. And that’s the metric everyone should watch closely.
Trick question (sort of). While there's no single entity pulling the strings, there’s one clearly wrong answer: the Fed does not control the 10-year Treasury yield. That rate is set by the bond market - a constantly shifting crowd of investors who react to growth, inflation, and fiscal expectations.
Yes, the Fed can influence it indirectly through rate policy and balance sheet moves, but the long end of the curve marches to its own drum.
And by the way, if you’re hoping the Fed will cut rates and bring mortgage rates down, I have bad news. Mortgage rates (including commercial loans) are tied to long-term Treasury yields, not the short-term overnight rate the Fed controls.
❗️So why does all this matter now?
Because when markets see bigger deficits on the horizon, they brace for a flood of new Treasury issuance. That means more supply, and unless demand keeps up, prices fall and yields rise.
What does this mean for your portfolio? And how should LPs, GPs, and capital allocators rethink their strategies going forward?
Let’s talk about it.