Trump's next reckoning: the fixed-income market's fiscal deficit focus

President Donald Trump cut a deal with blue-state Republicans on taxes and put down an 11th-hour rebellion by conservatives over spending to get his “one big, beautiful bill” passed by the House.

But if he’s going to shepherd the signature legislative package of his second term through the Senate, he may have to reckon with an even more demanding constituency: customers for the ballooning amount of US debt.

With the yield on 30-year Treasury bonds again passing the 5% mark on Wednesday, the nation’s creditors injected a dose of harsh economic reality into Trump’s fiscal policy — and not for the first time. Last week, a third bond-rating provider lowered the US sovereign grade, projecting the nation’s debt surging to 134% of the size of the economy in 10 years, from roughly 100% today.

That’s a long way from the vision Trump offered in his March address to Congress, when he promised a balanced budget “in the near future.” The House bill features a bevy of new tax breaks for key political constituencies — tipped and hourly workers, car buyers and seniors. And indications from GOP senators suggest they’ll seek to pare back spending cuts to shield others from financial pain.

Trump’s lieutenants, including Treasury Secretary Scott Bessent, argue that the package will boost business sentiment and unlock spending and investment. Trump’s allies on Capitol Hill also see it as the centerpiece of the party’s legislative agenda, and a counterweight to the uncertainty prompted by Trump’s haphazard tariff policies.

Bond market participants see something else.

“People are getting fed up. It’s clear that there are no adults in the room in Washington. Zero. No accountability,” said John Fath, managing partner at BTG Pactual Asset Management US LLC. “You have to ask yourself, what is it going to take? It’s going to be the price action.”

The action has been notable already. As Trump was putting pressure on House members to back the tax bill, the Treasury on Wednesday found tepid demand at an auction of 20-year bonds. Not just Treasuries, but stocks, too, tumbled as investor concern over the US fiscal profile deepened.

The moves were reminiscent of Trump’s wrangle with the bond markets last month, when he blinked. In the early morning hours of April 9, Treasury yields surged as Trump’s steep retaliatory tariffs — the highest in more than a century — went into effect. While a months-long slump in equities barely fazed him, the bond market got his attention. 

“The bond market is very tricky,” he said at the time, announcing that he was suspending most of the tariffs just hours after they went into effect. “But yeah, I saw it last night where people were getting a little queasy.”

Interest Bill

If Treasuries continue to stay queasy, the higher yields not only threaten to dampen economic growth — as they translate into higher borrowing costs for everything from homes to cars — but to accelerate the government’s fiscal deterioration. As rates rise, so does the Treasury’s interest bill. 

“Investors are now asking themselves a very difficult question, which is, would you loan the US government money at 5% for 30 years?” said George Catrambone, head of fixed income and trading at DWS Americas. “That’s the question that we have and are facing the long end of the Treasury market.”

Unlike in April, Trump has not had Bessent — who has been speaking to investors in Saudi Arabia and meeting with Group of Seven Finance Ministers in Canada — hovering over his shoulder as he negotiated the House’s tax bill in the Oval Office. It was Bessent, a hedge fund veteran, who helped persuade Trump to pause the tariffs when bond markets sent distress signals.

Bessent last month played down the selloff in Treasuries as a function of deleveraging by some market participants. In Banff, Canada, for meetings with Group of Seven partners, as of Thursday morning he had not weighed in on the most recent market volatility.

Friday’s removal of the US from the ranks of Aaa issuers by Moody’s Investors Service renewed market participants’ focus on the fiscal deficit — which has exceeded 6% of gross domestic product the past two years, unprecedented in the modern era for a time outside of recession or war. S&P Global Ratings took that step in 2011, and Fitch Ratings did so in 2023.

Moody’s said American economic strengths could “no longer fully counterbalance the decline in fiscal metrics.”

Even before the latest tax bill, which economists anticipate will deepen the deficit, the nonpartisan Congressional Budget Office projected that the US will see a record debt-to-GDP ratio by 2029.

“I do not know how much more of a wake-up call we need to get our house in order,” Ralph Norman, a South Carolina Republican, told Bloomberg Television Wednesday. “So all we are asking for is you need to pay for any expense you have.”

One of those expenses: The increase in the cap on state and local tax deductions. Set at $10,000 in Trump’s 2017 tax law, Republicans from high-tax states like New York and California negotiated an increase to $40,000 as the price of their votes for the package. 

But it was a 12-basis-point increase in 30-year Treasury yields Wednesday that seems to have provided the impetus for further spending cuts to make the bill palatable to Republican hard-liners.

“The bond market seems to have spoken,” said Representative Warren Davidson of Ohio, one of two Republicans to vote ‘no’ on the bill.

Tush Push

As the bond markets started to show unease this week, Trump redoubled his efforts to get the measure — formally named the One Big Beautiful Bill Act — passed in the House. He visited Capitol Hill, called lawmakers and invited holdouts to the White House. 

With the Memorial Day holiday weekend coming up, Republicans felt an urgency to get a legislative win in a presidency characterized by a blizzard of executive orders. 

“The bill has to be done as early as possible both because the American people deserve the money in their pockets and the changes in their lives, but it also needs to happen soon, so it can have the biggest impact,” said former House Speaker Newt Gingrich, a close Trump ally. “If we are in the middle of a Trump economic boom in 2026, we will keep the House.”

If Republicans fail to pass the tax package, just as tariffs create a drag on the economy, then voters could revolt in the midterms. “In 2026, the only question that will matter is: Is it working?” Gingrich added.

But there’s no guarantee that the uneasy truce among the party’s various factions will remain intact when the bill gets to the other side of the Capitol.

Senate Majority Leader John Thune — who will lead the effort to shepherd the bill through his chamber starting in June — called the ratings agency downgrades “a warning shot that we need to get serious about spending restraint.” He said this week that any final bill would need to make a meaningful dent in spending, but also boost faster economic growth.