The recent House Republican bill lacks clear cost estimates and may undergo significant changes in the Senate. Nevertheless, it’s already causing a stir in the global financial markets.
As the bill advanced, US bonds were sold off, which could potentially increase the national deficit by trillions. The deficit has been around 120% of GDP since the pandemic began.
Both the 2010 and 2010 US Treasury bonds traded at yields above 5.1% on Thursday morning, marking the highest rates since 2007. Additionally, benchmark 10-year notes surpassed 4.6%, a level not seen since February.
These elevated yields suggest that investors are seeking higher returns on public investments.
Initial projections from the Congressional Budget Office (CBO) indicate that the GOP bill could add $2.3 trillion to the deficit over the next ten years, although this figure doesn’t account for the interplay between various budget and tax cuts.
Bankers and investors have expressed disappointment over the scale of budget cuts within the Republican proposal. It’s anticipated to push 8.6 million individuals out of the National Health Insurance Program and 3 million from food aid programs.
“Everyone I’ve talked to in financial circles thought the bill would push for tighter financial constraints, but it doesn’t appear that way,” one investor commented.
He further noted, “There are many Treasury issues, and their preference for a higher yield indicates they want it at a lower price.”
Some investors were not surprised by the significant tax cuts for the wealthy in the Republican bill, as social service cuts are often unpopular and tricky to implement.
The Senate may revert some of the spending cuts proposed by the House, which could total around $1.5 trillion affecting various sectors including Energy, Education, and Agriculture.
However, the macroeconomic implications of tariffs are what may really catch investors off guard, disrupting traditional relationships between bonds, gold, and the US dollar.
In this broader context, bond market sell-offs from the GOP bill could escalate. “I’ve observed this frequently,” said Axel Merck of Merck Investment. “Typically, higher long-term yields mean a stronger dollar and weaker gold, but we’re seeing both the dollar and gold strengthen unexpectedly.”
He added, “These significant flaws in fiscal policy are hard to overlook.”
This week’s 20-year U.S. Treasury auction reflected ongoing challenges in the bond market, experiencing weak demand from investors.
The Treasury sold $16 billion worth of 20-year bonds at a 5.05% yield, which is about 4.6% higher than the average from previous auctions.
Analysts from Deutsche Bank characterized the auction as “soft,” leading to a dip in the stock market this week.
“Soft auctions for 20 years often result in a broader market slump, as evidenced by the S&P 500’s 0.2% drop,” Jim Reed and colleagues wrote.
Overall, stock prices have fallen this week, with both the Dow Jones Industrial Average and the S&P 500 down roughly 1% since Monday.
In both the short and long term, rising interest rates will increase borrowing costs, adding another layer of financial resistance stemming from the GOP bill.
The Federal Reserve cut interest rates after nearly two decades of high levels brought on by the pandemic, but they have held steady since December as the economic landscape remains uncertain.
Current short-term interest rates sit at about 4.3%, the highest rate since November 2007.
Federal Reserve Chairman Jerome Powell suggested that the era of near-zero interest rates may be over, a stark shift from the previous decade.
