The turning point was last Friday’s credit outlook downgrade by Moody’s, which was quickly followed by a political debate around tax cuts—targeting social spending that supports the poorest, to give further tax relief to the wealthiest Americans. According to a nonpartisan agency, this plan would inflate the national debt by an additional $4 trillion—on top of the nearly $37 trillion already looming and expanding exponentially.

Why can the US afford to keep borrowing at this scale—and at relatively low cost? Because global investors still crave US debt. Treasuries are liquid, long perceived as low-risk, and feature in virtually every well-balanced and calibrated portfolio—including those of central banks. And when things go wrong, the Federal Reserve (Fed) steps in and buys huge amounts of government bonds to calm market nerves. Treasuries are a unique investment tool.

The issue today, however, is that the Fed is now sitting on a mountain of that debt, which it is slowly trying to let mature. That’s not the core concern, though. What’s changing is that investors are beginning to question whether this ever-growing US debt load is truly viable—and perhaps more importantly, whether it’s as low risk as we pretend it to be.

Because here’s the bottom line: the strength and credibility of the US Treasury market is the real foundation of the US exceptionalism narrative. It’s not Apple or Nvidia. It’s the fact that the US has been able to fund its economy and respond to crises through this unparalleled debt market. That’s what’s made the US so globally dominant. And that special status is something investors gave—and something they could take away.

We saw clear signs of that yesterday when the US Treasury’s 20-year bond auction fell flat. Yields hit around 5.10%—the highest since the tenor was reintroduced in 2020. Weak demand triggered a broader selloff across the curve, pushing 10-year yields to 4.60% and 30-year yields back above the 5% mark. This was the market’s way of signaling a lack of confidence in the US government and its policy direction.

This also responds, at least partly, to the million dollar question of ‘could yields go higher?’ Yes—a lot higher. Back in 1981, the 10-year yield stood above 15%, and the 30-year has been steadily declining from near 10% since 1987. I don’t expect a return to those extremes, but a sustained move above 5%—especially if underpinned by structurally higher inflation—is definitely possible. In the short run, we could even see a spike, similar to what we saw during the UK’s mini-budget crisis under Liz Truss.

Going forward, the trajectory of US yields will depend on two things:

What could slow down this shift away from US debt? The lack of a clear alternative. Gold continues to attract demand from central banks and conservative investors looking to hedge trade and geopolitical risks. German and European bonds could offer an alternative with relatively stable political backdrops (despite the fading of austerity and the rise of the far right).

But a large-scale change in global portfolio thinking will take time. This means that if the US can get its fiscal house in order—by addressing debt concerns and proposing a credible budget—the tide could quickly turn back in favour of US bonds. A rally is still very much on the table, depending on how US politicians manage their debt, global partnerships, and strategic alliances.

On that note, the EU is reportedly preparing a trade proposal for the US that touches on key American interests, environmental standards, economic security, and a gradual reduction of tariffs to 0% on non-sensitive agricultural and industrial goods. But the bloc is also readying a plan B in case talks break down: $100+ billion worth of tariffs on US goods. The market could react either way—positive progress could extend the rally, but a breakdown and re-escalation would likely trigger a selloff across the Stoxx 600, which has now fully recovered and even exceeded its post-April 2 losses.

In the US, the surge in yields weighed heavily on equities. The S&P 500 dropped 1.6%, while the Nasdaq retreated 1.34%.

On the earnings front, both Home Depot and Lowe’s reported better-than-expected results, showing that consumer spending on home-related goods remains resilient. Notably, Home Depot said it has no plans to raise prices due to tariffs, as about half of its products are sourced domestically. But other retailers are less shielded.

Walmart previously stated it would raise prices in response to tariffs, while Target missed both Q1 revenue and earnings, cut its full-year guidance, and cited tariff uncertainty, weak consumer sentiment, and backlash from rolling back DEI initiatives in January. That last point gives me some hope that not everything is about to collapse within a four-year term.

Elsewhere, Baidu dropped more than 4% despite posting stronger-than-expected Q1 results. Apple fell more than 2% after OpenAI announced its acquisition of a company called io—co-founded by Jony Ive, the former Apple design chief aiming to build new AI devices, with the first product expected sometime next year. We can’t wait!