Treasury Yields Soared on Tuesday. Why That Could Be a Big Problem

The bond market, which has made President Donald Trump rethink policy before, is protesting again and sending borrowing costs higher.

The yield on the 10-year U.S. Treasury note—a key input into mortgage rates and business investment decisions—rose to its highest level in months on Tuesday. The jump followed Trump’s demand that the United States should be allowed to buy Greenland, risking a trade war with the European Union.

“Investors are concerned that the threat of a 200% tariff on French wine and champagne could be the beginning of a further escalation in the trade tensions that many had hoped to leave behind in 2025,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients.

The 10-year yield jumped to around 4.29% in late-afternoon trading, its highest level since August. Yields move in the opposite direction from bond prices.

Greenland wasn’t the only driver of Tuesday’s moves, Lyngen wrote, flagging a “broader tone of bearishness” in global bond markets. Investors tend to sell government bonds when they see policy-related risks—higher budget deficits, tariffs or overly aggressive stimulus efforts—driving up inflation.

By selling those bonds, they force governments to pay higher interest rates to compensate investors for those risks. That ultimately drives up borrowing costs for households and businesses.

It’s a dynamic that, in the past, has helped convince Trump to back away from some policies. In April, he scaled back his Liberation Day tariffs after bond markets sold off sharply. In July, he backed away from firing Federal Reserve Chair Jerome Powell after markets showed their disapproval.

A series of factors, including Trump’s ongoing tensions with the Fed, could keep driving rates higher.

“Recent developments suggest that U.S. yields are more likely to drift higher than lower in the coming months,” Guneet Dhingra, senior U.S. economist at BNP Paribas, wrote on Tuesday, foreseeing the 10-year yield rising to 4.5% this year.

‘A Perfect Storm’

On Tuesday, bond markets were navigating “a perfect storm,” wrote Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.

In Japan, bond investors are raising concerns over the country’s fiscal path. That’s spilling over into U.S. bonds, given the global nature of bond markets—European pension funds invest in both Japanese and U.S. securities and vice versa.

Closer to home, U.S. economic data was “solid” to close out the year, Goldberg said. A resilient economy gives the Federal Reserve less reason to cut interest rates again, since the economy may not need an extra boost from lower borrowing costs. Some analysts now expect the Fed may not cut rates at all in 2026.

The Fed only sets short-term interest rates, not longer-term borrowing costs. However, if markets expect the Fed to keep rates higher on average over the next decade, the 10-year yield tends to rise. Mortgage rates follow along, making buying a home or refinancing more expensive.

Add to that the Greenland headlines, which sparked “fears about foreign liquidations” of U.S. Treasury bonds, Goldberg wrote. 

‘Sell America’ Again?

To retaliate against U.S. pressure and tariffs, European officials could impose their own tariffs. However, they can also retaliate by dumping some of their holdings of U.S. government debt—forcing the Treasury to pay more interest to lure investors back.

There were signs of a “sell America” trade in April, when Trump’s aggressive tariff policies spooked markets. That quickly faded, as global investors decided to stick with U.S. government bonds—a big pool of assets where they can earn interest as they invest their spare cash.

European investors “likely have limited options if they wish to rotate out of Treasuries,” Goldberg wrote, given the sheer size of the U.S. bond market. However, some may choose to sell or perhaps buy fewer U.S. government bonds going forward, he added.

America’s Largest Lender

AkademikerPension, a Danish pension fund, said on Tuesday it was selling its U.S. Treasurys. It told Bloomberg that rising U.S. debt levels made the country “not a good credit,” though it also flagged Trump’s pressure to buy Greenland from Denmark.

Europe “owns a lot of Treasuries,” George Saravelos, a strategist at Deutsche Bank, wrote in a note to clients on Sunday, tallying some $8 trillion in U.S. bonds and equity holdings from European countries.

“For all its military and economic strength, the U.S. has one key weakness: it relies on others to pay its bills via large external deficits,” Saravelos wrote. “Europe, on the other hand, is America’s largest lender.”

The moves over the last few days “have potential to further encourage dollar rebalancing,” Saravelos wrote, as investors sell U.S. dollar assets and put pressure on the greenback.

Treasury Secretary Scott Bessent sought to ease tensions on Tuesday, saying the “worst thing countries can do is escalate against the United States.” He recalled the “panic” after Trump’s tariff plans in April sparked retaliation.

“What I’m urging everyone here to do is sit back, take a deep breath, and let things play out,” Bessent told reporters in Davos, Switzerland.