Investors are fearing that projections for the U.S. debt mountain could increase further when a sweeping tax and spending bill goes through the Senate, with the risk that bond yields stay higher for longer.
Markets have been sensitive to the deteriorating U.S. debt profile, exacerbated by Moody's downgrade of the U.S. sovereign credit rating on May 16.
Long-dated bonds have been especially hurt by deficit concerns, with investors delivering a tepid response to a 20-year auction and sending the 30-year bond yield to its highest level since October 2023. Higher bond yields can translate into higher borrowing costs for consumers, businesses and governments.
"The concern is that as the bill winds its way through the Senate, spending cuts will get whittled down, stimulus will be added and the deficit will show even more growth," said Brian Nick, chief investment officer at NewEdge Wealth, who sees that translating into higher bond yields and a steeper yield curve.
The House of Representatives' version of the tax bill is calculated to add about $3.8 trillion to the federal government's $36.2 trillion in debt over the next decade, according to the Congressional Budget Office.
After passing a House vote on Thursday, the bill heads to the Senate, where members are expected to begin work on it after next week's Memorial Day recess. Some of the bill's provisions will be welcome to Republican voters, but senators are still expected to push for changes.
“The Senate will be less keen to include deep spending cuts and the longer the debate continues, the more likely the price tag goes up,” said Christopher Hodge, chief U.S. economist at Natixis.
To be sure, investors see an uplift to growth from the tax cuts as well as the tariff revenues, which they are balancing in their investment decisions.
Trump and his team, including White House Press Secretary Karoline Leavitt, have emphasized the $1.6 trillion in outright spending cuts when asked about the potential impact on the deficit of the fiscal bill. Top Republicans have argued that tax cuts will pay for themselves by stimulating higher economic growth and generating $2.5 trillion in new revenue over a decade.
“The American people voted for President Trump to restore fiscal sanity to our government – and by securing the largest deficit reduction in 30 years, the largest tax cut for middle and working-class Americans in history, and $1.6 trillion in savings, the One, Big, Beautiful Bill delivers," said Anna Kelly, a White House spokeswoman. "This President is restoring accountability to taxpayers, and everyone from Main Street to Wall Street will benefit."
Some specific winners are seen from the changes. A research note from Morgan Stanley said the tax bill is expected to benefit companies with elevated capital expenditure and revenue in the U.S. and said specific sectors it sees as having uplift are industrials, communications services and energy.
Morgan Stanley also estimated that tariffs could generate $2 trillion of revenue over 10 years, although it emphasized that this could change as trade talks are ongoing.
Naomi Fink, chief global strategist at Nikko Asset Management, said that the tax cuts may be intended to stimulate demand, although she added, "if they don't do that faster than they drive up government debt funding costs, it won't work."
HOUSE BILL DRAWS SKEPTICISM
Some investors were disappointed about the version of the bill so far.
Mohit Mittal, chief investment officer for core strategies and a managing director at PIMCO, said investors had expected more in the way of spending cuts.
"Over the next 10 years, the final bill is probably going to end up being ... $50 (billion) to $75 billion higher per year than what the market was anticipating," he said.
Steve Sosnick, chief strategist at Interactive Brokers, said in a note to clients on Thursday that the last thing global bond markets wanted to see was "legislation that risks creating larger budget deficits in the world’s largest economy."
Still, that does not mean that bond investors are shunning the rich yields offered by those longer bonds, although many now demand higher yields.
"As a long-term investor, that (steeper yield curve) slope is attractive," said Thanos Bardas, senior portfolio manager of investment grade fixed income at Neuberger Berman, who believes bond investors will rely on yields for their returns in the coming months.
Other investors also are eying longer-term bonds. Paul Karger, co-founder and managing partner of TwinFocus, said his team has increasingly been adding to their holdings in recent days and weeks.
But Mike Reynolds, vice president, investment strategy at Glenmede, believes yields still have not reached levels where it makes sense to become a buyer.
Investors will be closely monitoring the impact of both the House bill and the looming Senate debate on financial markets, which may in turn filter back to members of Congress and play a role in shaping the bill's final version.
"Lawmakers pay closer attention to voters and polls than they do the financial markets," Brian Gardner, chief Washington policy strategist at Stifel Financial, said in a note to clients on Thursday. He added, however, that lawmakers also notice when market movements create higher lending rates for consumers.
U.S. senators, he said, "will be watching signals from Wall Street."
(This story has been corrected to fix the title of Mike Reynolds in paragraph 21)
