In the world’s biggest bond market, investors are pushing back against US President Donald Trump’s tax-cut plan.
On Wednesday, they drove yields on benchmark 30-year US Treasuries to as high as 5.1 percent, leaving them just shy of a two-decade high and sparking declines in stocks and the US dollar as administration officials met with lawmakers to hammer out a deal to enact the cuts.
The concern is that the tax bill would add trillions of dollars to already bulging budget deficits at a time when investor appetite is waning for US assets across the globe.
Photo: Reuters
“Make no mistake, the bond market will have its own vote on the terms of the budget bill,” said George Catrambone, head of fixed income and trading at DWS Americas. “It doesn’t seem this president or this Congress is actually going to meaningfully reduce the deficit.”
Investor sentiment toward Treasuries, which took a big hit after Moody’s Ratings stripped the US of its top credit grade late last week, deteriorated further on Wednesday following an auction of 20-year bonds that drew surprisingly tepid demand.
The rout deepened a weeks-long selloff in bonds and underscored investors’ deepening disenchantment with the push in Washington to pile on more debt. The fixed-income slide also emboldened some lawmakers who oppose Trump’s tax-cut plan, with some writing on social media about the bond slump and the message it was sending.
On Wednesday night, Republican leaders in the US House of Representatives released a new version of the bill with a higher limit on the deduction for state and local taxes and other changes in a bid to win over warring factions to support the legislation.
Overall, bond investors are demanding more compensation to buy longer maturities — and not just for the US. Japanese and UK 30-year yields also have risen sharply this week.
“The bond market is giving a warning sign to policymakers that fiscal sustainability issues cannot be ignored for too much longer,” said Priya Misra, a portfolio manager at JPMorgan Asset Management. “It is not just the bond market, but now those fears are gripping risk sentiment and equities, and credit are also paying attention.”
The stirring of the so-called bond vigilantes marks a moment when enough investors decide that only by imposing higher borrowing costs will governments finally bow to the pressure and cut spending. It is a process that last played out in the US during the early stages of the administration of then-US president Bill Clinton in 1993 and in Europe after the financial crisis.
“The market’s gonna bring discipline to this thing one way or the other,” said Tim Magnusson, the chief investment officer at US$11.5 billion hedge fund Garda Capital Partners.
“Until you tackle entitlement reform — social security, Medicare, Medicaid — they are not going to move the needle. That’s the only way. It’s always the bond market that brings the discipline,” Magnusson said.
While current US yields between 4 and 5 percent are near levels that prevailed before 2007 and the financial crisis — and the US historically has paid far higher rates at times — debt and deficits now are exponentially bigger.
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