Economists warned that President Trump might rethink his tariff strategy once 10-year Treasury yields crossed 5%, but what if rates nearly double from that so-called capitulation point?
While that scenario isn’t the base case, Vanguard’s global chief economist, Joseph Davis, says the odds of 10-year yields hitting 9% within the next five to ten years are far from zero.
In a recent interview, Davis warned that the U.S. is already sowing the seeds of its own fiscal crisis with massive, structural deficits.
“I wouldn’t want to be alarmist, but if these deficits continue at a higher pace and AI does not prove transformative, in five to 10 years, there’s approximately a 20% probability that the 10-year Treasury approaches 9%, with the average settling close to 7%,” Davis said.
“This will not happen overnight, and technology would have to disappoint, but structural deficits can have consequences.”
Fiscal warning signs have been flashing for years, but the pace has accelerated.
Government spending on healthcare, Social Security, and interest payments has consistently outpaced revenue since the early 2000s.
Now, the Congressional Budget Office projects the 2025 federal deficit will hit $1.9 trillion, the third-largest annual shortfall in U.S. history.
The “big, beautiful" backlash
The outlook could get worse.
President Trump’s proposed deficit-expanding legislation — dubbed the “Big Beautiful Bill” — rolls together sweeping tax cuts, debt ceiling hikes, and a mix of new spending initiatives.
CBO analysts say the bill would add another $2.4 trillion to the primary deficit over the next decade.
Critics across Wall Street say the proposal is already moving markets.
Bond vigilantes have resumed selling off Treasurys in protest in a deliberate effort to punish Washington for ignoring basic fiscal math.
“The market’s fighting with the government right now,” said Tom di Galoma of Mischler Financial Group. “Investors are trying to impose discipline.”
Jeremy Schwartz, CIO at WisdomTree, went further, warning that an “interest rate blowout” could be coming if the bill passes without offsetting cuts.
The House has already passed a version of the bill with modest changes. The Senate is expected to take it up before the end of June.
President Trump has called on lawmakers to send it to his desk by July 4.
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