5 min read
Financial markets are sending the politicians in Washington, D.C., an urgent message: It’s time to start dealing with the gargantuan national debt.
Congress’s response: Nah. Instead, we’ll issue more debt.
Few people in the nation’s capital seem to be noticing what’s happening in bond markets, where interest rates are rising in an unusual trading pattern. The 30-year Treasury bond recently crested 5.1%, the highest level since 2007. The 10-year Treasury note has drifted up toward 4.6%, the highest level since February.
Those rates are not inherently problematic on their own. What’s odd, however, is that dollar-denominated rates have been rising at the same time investors perceive higher risk in markets due to the effects of President Trump’s tariffs and a swollen national debt that may finally be reaching crisis proportions.
When investors think risk is rising, they typically put more money into US Treasury securities because of their “safe haven” status. More demand for Treasurys pushes rates down. Volatile markets such as those of the last few months would normally channel more money into Treasurys, lowering rates.
That hasn’t been happening. Instead, rates have been rising, with less money going into Treasurys and some investors selling. This has become known as the “Sell America” trade, a new aversion to US assets among investors who normally can’t get enough of them.
One trigger for the Sell America trade is concern that the reckoning for years of fiscal recklessness has finally arrived. The rating agency Moody’s underscored this on May 16 when it downgraded the US credit rating, the last of three main rating agencies to do so. The US economy is strong, Moody’s said, but “successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs."
Investors are zeroed in on the problem. “Is a US government debt crisis imminent?” economist Ed Yardeni of Yardeni Research asked in a recent analysis. “It's possible. Stock and bond investors may be starting to get jittery over … federal deficits and debt.”
Yet instead of heeding the lesson, Republicans who control Congress are well on their way toward passing a tax-cut package that will make the problem considerably worse. The tax-cut bill passed by the House on May 22 will add at least $3 trillion to the national debt during the next decade. The biggest provisions extend a series of tax cuts for individuals that are due to expire at the end of 2025.
The bill now moves to the Senate, which could impose meaningful changes. But if anything, those could add to the cost of the bill. The House version, for instance, includes hundreds of billions of dollars in cuts to Medicaid, the healthcare program for the poor. The Senate could scale those back, producing a final bill that adds even more to the national debt.
