‘They’re going to dictate the terms’: Bond market hits panic button over GOP tax bill

Investors are sending strong signals of concern to Congress this week as Republicans negotiate a tax bill that would significantly increase federal deficits. The market response has been evident in the surging long-term costs of financing the national debt, marking a notable shift in investor sentiment toward U.S. Treasury debt.

The immediate catalyst for market anxiety was a credit downgrade by Moody’s of the U.S. government’s borrower status, a move that had been previously signaled in 2023. While this downgrade didn’t reveal new information to bond investors, it served to concentrate attention on the growing debt concerns.

According to Politico, House Budget Chair Jodey Arrington, a Republican from Texas, acknowledged the bond market’s crucial role, stating “If the bond markets don’t think we’re serious, I’m not sure it will matter what we do, because they’re going to dictate the terms.”

Bond yields reach concerning levels as investors demand higher returns

The market reaction has pushed yields on 20-year and 30-year government bonds above 5 percent, reflecting investors’ demands for more attractive returns to continue lending to the U.S. Treasury. This development means an increasing portion of tax dollars will be directed toward interest payments on federal debt rather than other productive purposes.

John Velis, Americas macro strategist at BNY Mellon, which oversees $53 trillion in assets, noted a significant change in market sentiment, saying this marks the first time in his professional career that investors are looking unfavorably at Treasury debt.

The tax bill, which has already passed the House, now faces challenges in the Senate, where some Republicans, including Senator Ron Johnson of Wisconsin, are calling for substantial spending cuts to bring U.S. expenditure back to pre-pandemic levels. The delicate compromise achieved in the House could be disrupted by any modifications to the bill.

Financial experts note that while there are reasons to maintain calm, as many institutions hold U.S. government debt for various strategic reasons, the market’s warning signals shouldn’t be ignored. Guy LeBas, chief fixed income strategist at Janney Capital Management, points out that 65 to 70 percent of debt holders are unlikely to sell significantly, creating a degree of market stability despite current concerns. However, the broader message from investors suggests growing unease about the trajectory of U.S. fiscal policy and its long-term implications for government borrowing costs.