President Donald Trump's "large, beautiful" tax bill has dramatically increased U.S. public debt, triggering investors' alerts and raising questions about how long the world will raise money for Washington's massive amounts of money.
The cost of long-term borrowing in the U.S. rose early this week after a budget bill was filed by a congressional committee on Sunday, and it is estimated that the passage of extended tax cuts will increase the trillions of dollars in the next decade. The bill progressed after Moody's stripped the original triple AA credit rating on Friday.
The bill and credit downgrades have made people anxious about the sustainability of U.S. public finance when many investors and analysts say debt and deficits are at uncomfortable levels.
"It's like taking a boat to the rocks and making those on board argue about which way to turn," Ray Dalio, billionaire founder of hedge fund Bridgewater Associates, told the Financial Times.
He added: "I don't care whether they turn left or right, like I care about the track they turn around and get on the boat."
The proposed legislation, repeatedly known as the "big and beautiful bill" will extend substantial tax cuts in 2017 during the president's first term.
This will also significantly reduce Medicaid insurance plans for low-income individuals and food assistance programs. Hard-strength Republicans are pushing for bigger spending cuts.
White House press secretary Karoline Leavitt said Monday that the bill “does not increase the deficit”, echoing other Trump administration officials who suggested tax cuts would accelerate economic growth.
However, the non-partisan committee of the non-partisan federal budget estimates that the legislation will increase public debt by at least 3.3tn until the end of 2034. The organization will also increase the debt-to-GDP ratio from 100% today to a record 125%. Under current law, this will exceed 117% of the estimated period.
Meanwhile, the annual deficit will rise from 6.4% in 2024 to 6.9% of GDP.
The increase in public debt needs to be financed by investors, and the Treasury accelerated sales of its bonds. However, there are signs that debt investors will insist on buying debt with higher yields, thereby increasing borrowing costs.
Monday's 30-year fiscal yield rose to 5.04%, the highest level since 2023, after the House Budget Committee introduced legislation and followed Friday's Moody's downgrade.
"We are at a turning point in the treasury market, and in order for Treasury bonds to stay at these current levels, we need some good news soon," said Tim Magnusson, chief investment officer at Garda Capital Partners. "If a bond market is needed, the bond market will become discipline."
Yardeni Research President Edward Yardeni repeats a term he coined in the 1980s to describe market opposition to loose fiscal policy: “Bond vigilance has taken root and they are ready to take action,” he said.
Dalio said the U.S. needs to quickly reduce its deficit to 3% of GDP by reducing spending, increasing revenue and reducing actual borrowing costs.
Bill Campbell, portfolio manager at investment group Doubleline, noted that it was 20 and 30 years of treasury. "It doesn't seem like there is a serious effort to control the debt," he said.
Compared with other countries, the United States has long been able to experience large deficits because of the wide demand for Treasury bonds around the world, such as the world's de facto reserve assets and the US dollar.
This gives significant flexibility in public finance in the U.S. according to the rating agency. But the latest challenge is that investors are more concerned about their impact on dollar assets at a time of fiscal concerns and anxiety about Trump’s tariffs.
"The key issue is that over the past two months, the market has structurally reassessed its willingness to fund our twin deficits," said Deutsche Bank's George Saravelos.
"The combination of a reduced appetite for buying U.S. assets and a rigid U.S. fiscal process that locks in very high deficits is what makes the market very tense," he said.
Other reports by Steff Chávez