Trump May Be 'Smoking In The Dynamite Shed' With The Big, Beautiful Bill Pressuring Yields Higher (UPDATED)

Editor’s note: This story has been updated to add more context on the move in bond yields.

Long-term U.S. bond yields spiked last week to levels not seen since late 2023, after President Donald Trump's "One Big, Beautiful Tax Bill" was passed in the Republican-controlled House. The yield on 30-year Treasuries broke above the key 5% level, climbing as high as 5.15% on May 22, on investor concerns about ballooning deficits and the long-term risks of the country's mounting indebtedness.

To be sure, yields have retreated somewhat since then thanks to easing trade tensions after the president paused a move to slap 50% tariffs on Europe. A global yield decline in response to Japan's move to cut long-term debt issuance also helped.

Yet, according to Lawrence McDonald, founder of the Bear Traps Report, it's too soon to take comfort.

On Monday, McDonald fired off a blunt warning on X, about the potential catastrophic consequences of an extended surge in bond yields on the financial sector.

‘Smoking In The Dynamite Shed’

"Washington – They are smoking in the dynamite shed," he wrote, urging investors to prepare for a world with 5% or even 5.5% yields on 10-year Treasuries. Ten-year yields peaked at 4.63% on May 22, and last topped 5% in October 2023.

“There is a price for higher for longer – it’s NOT free. Interest rates up, bond prices down,” McDonald said in an accompanying post on X, pointing to billions of dollars in bond losses faced by Japanese insurance firms.

McDonald also highlighted a policy shift floated by Treasury Secretary Scott Bessent: the possible reduction of the Supplementary Leverage Ratio, a key regulatory capital rule for large banks.

"Bessent’s move toward lowering the SLR… reeks of financial repression," McDonald said. Loosening the SLR would allow banks to load up on more Treasuries with less capital, possibly papering over demand issues but at the cost of financial stability.

Regional Banks Are More Interest-Rate Sensitive

The surge in yields has created winners and losers within the banking sector—and the divide is stark. In a follow-up comment, McDonald highlighted a striking divergence between large-cap financials and regional lenders.

"Who is wearing the interest rate risk? Who doesn't have the hedges on? It's pretty clear."

The interest-rate risks are once again squarely on the shoulders of banks—especially smaller ones.

The Financial Select Sector SPDR Fund XLF—dominated by financial behemoths like JPMorgan Chase & Co. JPM, Goldman Sachs Group Inc. GS, and Bank of America Corp. BAC—has been up 30% since January 2022.

Meanwhile, the SPDR S&P Regional Banking ETF KRE is down 21%, a gap that McDonald says you'd need to "look far and wide historically to find… outside some kind of crisis."

McDonald's comments also echo lessons of the March 2023 banking crisis, when Silicon Valley Bank’s failure exposed the danger of unhedged interest rate exposure. That crisis erupted after SVB sold long-term Treasuries at a loss to raise liquidity, prompting a wave of withdrawals.

The aftermath saw federal regulators step in with extraordinary support measures, including the Bank Term Funding Program.

Steep Yield Curve Lifts Big Banks, Sinks Regionals—Here's Why

Higher Treasury yields impact banks differently based on their size, funding structures and asset-liability profiles.

As the yield curve steepens, large banks gain from wider net interest margins, stronger trading revenue and diversified income streams.

Since Trump’s election victory in November 2024, the 30-year and 2-year Treasury spread has widened from 30 to 100 basis points, helping boost large-cap financials.

The Financial Select Sector SPDR Fund (XLF) has outperformed the SPDR S&P Regional Banking ETF (KRE) by 20% during the same period.

For regional banks, higher short-term funding costs, long-duration asset losses and weaker hedging strategies are eroding profitability. Many smaller lenders remain exposed to the same vulnerabilities that triggered the 2023 bank failures.

In this environment, a steeper curve is more of a risk signal than a recovery story for America's regional banking industry.

Chart: Big Banks Crushed Regionals As The Treasury Yield Curve Steepened

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