Investor unease over President Donald Trump’s economic programme drove the Government‘s borrowing costs to their highest level in nearly two decades, following House approval of tax legislation that is expected to add trillions of dollars to the ballooning US national debt.
The yield, or interest rate, on the 30-year Treasury bond briefly topped 5.15% on Thursday morning (local time) before closing just shy of 5.05%, reflecting investors’ demands for greater compensation in return for lending money to the US Government.
If yields remain elevated, they will eventually mean higher borrowing costs on mortgages, credit cards and auto loans. Already, the average rate on 30-year mortgages has risen to 6.81% from 6.62% in mid-April, according to Freddie Mac.
Higher bond yields also are likely to act as a headwind on stocks. The S&P 500 index dipped in early trading after the House passed the President‘s tax plan by a vote of 215-214 with all but two Republicans in the majority and every Democrat voting no. Stocks ended the day almost unchanged.
Long-term yields began rising in early April, as investors grappled with uncertainty arising from the president‘s announcement of the highest tariffs on imported goods in more than a century. Yields rose further in recent days as his “One Big Beautiful Bill” - the tax plan’s official name - advanced in Congress.
“The markets are watching the fiscal policy,” Federal Reserve Governor Christopher Waller told Fox Business Network on Thursday. “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.”
The centrepiece of the President‘s second-term agenda, the legislation would expand and make permanent his 2017 tax cuts. Administration officials have said the measure will produce an economic boom. But it also will add US$2.4 trillion ($4t) to the national debt over the next decade, according to the Congressional Budget Office.
Indeed, the legislation will worsen the federal government‘s already serious debt woes. In the fiscal year that ended October 1, Washington ran a budget deficit of more than 6% of gross domestic product, an unprecedented level outside of war or financial crisis.
As interest rates rose in recent years, Washington’s fiscal position deteriorated. During the past fiscal year, interest payments on the national debt cost taxpayers more than US$881 billion, more than twice the 2021 figure, according to the CBO. The Government now spends more on interest than it does on national defence or Medicare.
Yet at a time when many Republicans publicly bemoan the Government‘s chronic indebtedness, the bill the House just approved would lock in supersized deficits for years, economists said.
“This is arguably the most significant piece of Legislation that will ever be signed in the History of our Country!” the president wrote in a post on his social media site Truth Social.
Some of the House bill’s tax cuts - such as an increase in the standard deduction - are scheduled to expire in 2028. But most analysts expect a future Congress to make them permanent, as has happened multiple times in the past with similar budgetary gimmicks.
If those provisions are extended, the US debt-to-GDP ratio would double to 200% in 2055, according to the Yale Budget Lab. Only Sudan and Japan top that figure.
There is no surefire way to know when the US$26t debt held by the public will become too large. But the risk is that as the federal debt swells, investors will eventually demand ever-higher yields to continue buying Government securities. Those rising yields mean higher interest payments for the Government, which adds to the debt and fuels a vicious cycle of deteriorating federal finances.
Speaking to reporters earlier this month, Federal Reserve Chairman Jerome H. Powell said the nation’s debt is “on an unsustainable path”.
Investors expected Congress to extend Trump’s 2017 tax cuts. But they have been spooked by the cost of extra measures tucked into the bill, such as the President‘s call to eliminate the tax on tips and an expansion of the child tax credit, said Ernie Tedeschi, director of economics for the Yale Budget Lab.
Higher yields would cost taxpayers.
In compiling its budget forecasts, CBO assumes that the Government will pay less than 4% to borrow money for 10 years. If the yield on the 10-year treasury instead stayed at 4.5%, near its current level, it would mean an additional US$2.2 trillion in interest charges over the next decade, said Tedeschi, who was chief economist for the White House Council of Economic Advisers under President Joe Biden.
Treasury Secretary Scott Bessent, a self-professed “deficit hawk”, has said the administration plans over four years to gradually bring the annual budget deficit down to its long-term average around 3.5% of GDP. Tax cuts and the president‘s deregulation agenda will help by driving annual economic growth to 3%, well above the CBO forecast around 1.8%, he has said.
At the White House on Thursday, Russell Vought, director of the Office of Management and Budget, told reporters that the tax legislation was just “one piece of the fiscal puzzle”.
The administration plans separate legislation to enact billions of dollars worth of spending cuts developed by Elon Musk’s Department of Government Efficiency and is betting on US$3t in new revenue from import taxes to close the budget gap, Vought said.
While investors cheer lower taxes and less red tape, many worry about the tariff element of the president‘s economic agenda.
The President‘s imposition of a 10% tax on all imports plus higher rates on Chinese products, steel, aluminium, automobiles and auto parts is expected to dent growth. As he negotiates trade deals with more than a dozen nations, uncertainty over the ultimate level of US trade barriers is causing many businesses to delay investment plans.
“We’re worried about the economy slowing down… that you’ll get a stagflation shock,” said Priya Misra, a portfolio manager at J.P. Morgan Asset Management in New York, referring to a combination of sluggish growth and higher inflation.
The yield or interest rate demanded by investors also jumped earlier this month after Moody’s downgraded the US Government‘s triple-A credit rating and lowered the outlook to “negative” from “stable”, citing a continuing increase in debt and interest payments to levels “significantly higher” than other major governments.
Before the downgrade, Moody’s was the sole major credit rating agency that assigned the US Government its highest credit score. Standard & Poor’s cut its rating on US debt in 2011, and Fitch followed suit in 2023.
Foreign investors have been especially alert to the growing risks of holding US stocks, bonds and dollars. More than US$9t in US treasury securities are held overseas, up nearly 12% from one year ago.
But there are signs of waning foreign appetite for US assets.
In recent auctions of Treasury debt, fewer “indirect” bids - the type often employed by overseas investors - have been accepted. That indicates they are demanding higher yields before buying, according to Torsten Slok, chief economist for Apollo Global Management.
Foreign wariness of US assets comes after years of overseas investors expanding their dollar holdings. For several years, as the United States grew faster than Europe or Japan, portfolio managers piled into US assets.
“Given the relentless rush into US dollar assets for the last 20 years, you can see how at the margins some foreign investors are saying, ‘Look, you know what, it‘s probably time to take some chips off the dollar table,’” said Ajay Rajadhyaksha, global chairman of research for Barclays Bank.
The recent increase in US yields drew unflattering comparisons to a 2022 bond market revolt over British Government spending, which forced then-Prime Minister Liz Truss to abandon plans for unfunded tax cuts and ultimately drove her from office.
The US seems some distance from such an abrupt financial event. The run-up in US long-term bond yields is part of a global trend. Similar increases have occurred in Japan, the United Kingdom, Germany and Australia. The yield on the 30-year Japanese bond hit an all-time high this week.
Before the 2008 financial crisis, US 30-year yields around 5% were not unusual. They last traded at that level in mid-January, when many on Wall Street were still anticipating robust growth from the President‘s promise to lower taxes and deregulate the economy.
The difference now is that Trump and the Republican-controlled Congress are choosing to go further into the red when Government debt is much larger and growth prospects are dimmed by tariffs and long-term forces such as societal ageing.
“That‘s what people are looking at, which is how is an investor going to get a good return when the structural growth rate in the economy is softening and, in a good economic environment, debt accumulation by the Government is continuing and if anything accelerating,” said Bob Elliott, chief executive of Unlimited Funds in New York.
David J. Lynch is a staff writer on the financial desk who joined The Washington Post in November 2017.
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