(Bloomberg) — Long-term US Treasury yields are rising as investors revolt against ballooning government spending, but Deutsche Bank’s Tim Baker warns that the US dollar may end up paying the bigger price if fiscal concerns persist.

Thirty-year Treasury yields surged over 5% this week to their highest level since 2023, after Republicans clashed over, and finally passed Thursday morning, President Donald Trump’s signature tax bill — legislation expected to add to the national debt burden. Amid the wrangling on Capital Hill, a Deutsche index measuring US fiscal policy uncertainty hit a record high. 

“With the government showing little inclination to shrink these deficits, bond yields have marched higher,” Deutsche macro strategist Baker wrote in a note. “These yields may start to look enticing for a domestic investor who may be less uncomfortable with fiscal risks than foreigners.”

Although Thursday brought a pause in the surge, the 30-year rate still pushed as high as 5.15%, extending this month’s steady climb. The dollar has already bore the brunt of the market’s early reaction to Moody’s Ratings downgrade the US’ credit rating last Friday. 

A Bloomberg gauge of the US currency is now down nearly 1% on the week and more than 7% so far this year — its worst annual start on record in data going back to 2005.

“Treasuries may get some eventual support as domestics rotate away from equities, but the retreat from foreigners would still play dollar-negative,” Baker said.

Options traders are already bracing for further dollar weakness. Sentiment revealed by contracts this week, as measured against an aggregate gauge of the greenback over the next month, soured to its most bearish in five years, since the Covid-19 pandemic rattled global markets in March 2020.

“Even if domestics were to provide support for Treasuries at some point, it’d still leave the dollar lower as foreigners step back from the norm of solid buying,” Baker said.

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