House Republicans’ domestic agenda bill doesn’t have a topline cost estimate yet and faces the likelihood of major rewrites in the Senate, but it’s already sending shockwaves through global financial markets.
U.S. bonds have sold off in response to the House passage of the bill, which is likely to add trillions to a U.S. national deficit that has hovered around 120 percent of gross domestic product (GDP) since the pandemic.
Both the 30-year and the 20-year U.S. Treasuries were trading on a yield above 5.1 percent on Thursday morning. For the 30-year, that’s the highest level since 2007. The benchmark 10-year note was up above 4.6 percent, the highest level since February.
Those high yields for U.S. bonds mean that investors want a bigger return for their public investments, which seem like less of a sure thing in the face of massive, deficit-expanding tax cuts.
Preliminary estimates from the Congressional Budget Office (CBO) suggest the GOP bill could add $2.3 trillion to the deficit over ten years, though that number doesn’t include interactions between the various tranches of budget cuts and tax cuts.
Bankers and financiers are sounding notes of disappointment at the size of the budget cuts in the Republican bill, which are expected to kick 8.6 million people out of national health insurance programs and 3 million people off of food assistance programs.
“Everybody I’ve talked to in the financial markets, they’re staring at the bill, and they thought it was going to be much more in terms of fiscal restraint, and they’re not necessarily seeing it,” Federal Reserve Governor Christopher Waller said in a Thursday interview on Fox Business Network
“Therefore, there’s going to be a lot of issuance of Treasuries. And in order for them to buy these things, they want it at a lower price, and therefore, a higher yield,” he said.
Investors told The Hill that they weren’t all that surprised that the Republican bill would deliver substantial tax cuts, especially for top earners, without proportionate cuts to social services, which are politically unpopular and hard to pull off.
The Senate could further walk back the spending cuts delivered by the House, which total roughly $1.5 trillion between the Energy and Commerce, Education, and Agriculture committees.
What investors do think is remarkable is the macroeconomic effects of the tariffs, which are splitting up the traditional relationships between bonds, gold and the U.S. dollar.
In the context of these larger fractures, the bond market selloff from the GOP bill could be more pronounced, they say.
“It’s something I’m watching very closely,” Axel Merk, head of Merk Investments, told The Hill. “Usually, higher long term yields would mean a stronger dollar and weaker gold, whereas instead we’re seeing a weaker dollar and stronger gold.”
“Given the very significant deficits, [the fiscal policy] is something you can’t ignore,” he added.
The 20-year U.S. Treasury auction this week was another sore spot in the bond market and saw weak demand from investors.
The Treasury sold $16 billion of new 20-year bonds at a yield of 5.05 percent – well above the average of the previous auctions at around 4.6 percent.
Analysts for Deutsche Bank called the auction “soft” and said it set off a stock market decline this week.
“The soft 20-year auction was also a trigger for a broader market slump, with the S&P 500 falling from negative 0.2 percent on [Tuesday] to negative 1.61 percent by the close, its worst day in the past month,” Jim Reid and others wrote for Deutsche Bank.
Stocks have languished this week, with the Dow Jones Industrial Average and the S&P 500 index down about a percent since Monday
Higher interest rates, both in the short term and the long term, make the cost of borrowing money higher — another factor compounding the financial drag from the GOP bill.
The Fed has been cutting interest rates off of near-20-year highs prompted by pandemic shutdowns but has paused its cuts since December as economic conditions have wavered.
Short term interest rates are now at about 4.3 percent, the highest level since November 2007
Fed Chair Jerome Powell has said that he thinks the days of near-zero interest rates, as was the case during the previous decade, might well be over.
