A bond market crash is coming, and it’ll wipe out $30 trillion. Can Powell save us?
The warning signs are right in our face: a $30 trillion bond market collapse is coming, and nobody seems to know how to stop it, not even Federal Reserve Chair Jerome Powell.
As reported by Moody’s, the US credit rating was downgraded last Friday, dragging the last triple-A rating down a notch to Aa1. On Monday, investors wasted no time. They dumped bonds, and yields exploded.
The 30-year Treasury yield surged to 5.012%, the 10-year moved up to 4.54%, and the 2-year rose to 4.023%. This wasn’t just a reaction—it was a breakdown.
Moody’s explained the decision as a direct result of the growing cost of maintaining the US government’s ballooning deficit, made worse by rising interest payments and tighter financial conditions. The agency said:
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.”
Yields surge across Europe and Asia after US downgrade
Across the pond, the UK’s 10-year Gilt yield rose from 4.64% to 4.75%. Analysts say this jump was pushed by the Bank of England’s tightening strategy, which has made borrowing more expensive. Meanwhile, Germany’s 10-year Bund moved up slightly from 2.60% to 2.64%.
The European Commission didn’t help confidence either. On the same day, it downgraded its eurozone GDP growth forecast for 2025 from 1.3% to 0.9%, citing both fiscal problems and trade issues.
In India, the bond market held mostly steady. The 10-year yield was flat at 6.27%, with traders noting some stability after last week’s sharp drop. Still, the yield curve is steepening, which typically signals trouble ahead.
Japan’s 10-year yield ticked up to 1.49%, a result of the Bank of Japan raising rates earlier this year to 0.5% and pulling back from its stimulus program, which lifted borrowing costs and cut down bond purchases.
In China, the story’s different. Their 10-year yield slipped slightly to 1.66%, but that’s only because nobody expects real recovery in 2025. The property market’s still weak, and inflation isn’t rising fast enough to spark demand.
South Korea is also seeing upward movement. As of May 16, the 10-year government yield was 2.69%, while the 3-year rose to 2.366% and the 5-year climbed to 2.501%.
Powell keeps rates high as Trump slams the Fed
Back home, Powell has refused to cut interest rates or inject new liquidity into the economy at all. President Donald Trump has been openly attacking Powell for months. On Saturday, he posted on Truth Social that:
“THE CONSENSUS OF ALMOST EVERYBODY IS THAT, ‘THE FED SHOULD CUT RATES SOONER, RATHER THAN LATER.’ Too Late Powell, a man legendary for being Too Late, will probably blow it again – But who knows???”
Still, Powell’s not changing course. He’s stuck with the “higher for longer” strategy, keeping the federal funds rate between 4.25% and 4.50%. His justification? Ongoing tariff-related inflation and a strong economy. But Wall Street is only pricing in 2.7 rate cuts for 2025, and expectations for near-term relief are fading.
If Powell holds the line, bond yields could keep rising past the 5% danger zone, pushing markets closer to a full sell-off. This could hammer consumer borrowing, hike up mortgage rates beyond the current 7.5%, and kill any recovery in the housing market. Business investment would also suffer as financing costs climb, and early signs already show GDP softening from tariff pressure in the first quarter.
Consumers, who drive 70% of US GDP, could pull back too, especially with inflation still stuck above the Fed’s 2% target. A bond market crash could choke the economy, and if Powell doesn’t move soon, he’ll be blamed… loudly.
But there’s a catch. Cutting rates too soon, especially with tariffs likely to add up to 1% to CPI, risks igniting inflation all over again, perhaps even worse than it was in the fateful year of 2008. Powell’s made it clear he won’t cave to politics. Still, if the bond market breaks, he might not have a choice.
If things spin out of control, the US could face a debt servicing crisis. The projected $2 trillion deficit for 2025 and current interest payments (already 15% of the budget) would become unsustainable. That means cuts elsewhere, more downgrades, and possibly another hit to Treasury credibility.
There’s also the threat to banks. Those holding low-yield bonds bought during the easy money years, especially smaller regional banks, will suffer massive losses. We’ve seen this happen before with Silicon Valley Bank in 2023. The next one might not be so easy to contain.
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