As you probably know, the United States’ national debt is really big. As of right now, about $36 trillion-big. And as you very likely also know, a large chunk of that $36 trillion is issued in U.S. Treasury bonds — government debt that, historically, has been eagerly gobbled up by investors around the world as one of the safest assets in all of global finance.
All that to say, the House Ways and Means Committee passed an early version of President Trump’s tax bill Wednesday morning, and estimates say it will add $3.8 trillion to deficits over the next 10 years.
Historically, bond investors have more or less swallowed whatever new debt the U.S. government puts out there. This time around? The bond market may not be so thrilled.
Back in 2022, conservative U.K. prime minister Liz Truss unveiled a big new £45 billion tax cut. None of it was really paid for, and the Brits already had a ton of national debt, but the theory was the cuts would reignite the economy, thus result in more tax revenue.
To which the U.K. bond market replied, “Nah.”
“The bond market said, ‘This does not sound sustainable to us,’ and you saw a pretty significant surge in gilt yields,” said Winnie Cisar, head of global strategy at CreditSights.
Gilts are U.K. government bonds. Interest rates spiked so much it caused a mini financial crisis. The tax cuts were abandoned and Truss had to leave office.
Michael Goosay, chief investment officer and global head of fixed income at Principal Asset Management, said he doesn’t expect that to happen in the U.S. if a deficit-raising tax cut passes.
But, in light of the post-tariff bond turmoil last month, he said there’s still a question mark: “How do foreign investors … view this as a long term risk of the deterioration in the quality of the U.S. government as an issuer of debt?”
Goosay said that question mark was smaller when the U.S. took on a bunch of new spending or borrowing in the past.
“This seems to be really batting or battering around the bond market much more significantly,” he said.
Even if this tax bill doesn’t trigger the great American debt reckoning, bond experts say unless it’s significantly reworked, interest rates on government debt will likely rise.
“It doesn’t have to be to the point where it’s a full on crisis for this to create a lot of pain,” said Anil Kashyap, an economist at the University of Chicago Booth School of Business.
Not only do rising interest rates on government debt mean less money to go to government services, they also mean an increase in the cost of mortgages, auto loans and private borrowing.