Suzanne McGee
5 min read
By Suzanne McGee
(Reuters) -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.
President Donald Trump has said he wants a final bill on his desk by July 4. However, if it takes longer, it increases the risk that softer economic data will make spending cuts still more unpopular among senators, Nick said.
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."
