U.S. Treasury Market Braces for Storm as Trump Tax Cuts Fuel Deficit Concerns

The U.S. Treasury market is on the brink of a storm, with the Trump administration's massive tax cut legislation potentially serving as the final straw. The budget bill passed by the U.S. Congress is expected to increase the federal deficit by tens of billions of dollars over the next decade. This, coupled with a downgrade in credit ratings, has heightened concerns about the sustainability of U.S. public finances. Many investors and analysts have expressed alarm, stating that U.S. debt and deficits are already at alarmingly high levels.

Ray Dalio, the billionaire founder of Bridgewater Associates, compared the situation to a ship about to hit an iceberg, with the captains arguing over which direction to turn. He expressed more concern about whether the ship could return to the correct course rather than the specific direction it might take.

The tax reform bill, which extends Trump's large-scale tax cuts from his first term and plans to significantly reduce medical insurance and food assistance programs for low-income individuals, has sparked panic. White House Press Secretary asserted that the bill "will not increase the deficit," echoing other Trump administration officials who claim that tax cuts will accelerate economic growth. However, the non-partisan Committee for a Responsible Federal Budget estimates that the legislation will add at least 3.3 trillion dollars to public debt by the end of 2034. This would increase the debt-to-GDP ratio from the current 100% to a record 125%, far exceeding the 117% projected under existing laws. Annual deficits are expected to rise from approximately 6.4% of GDP in 2024 to 6.9%.

Following the House Budget Committee's advancement of the legislation and Moody's downgrade of the U.S. rating, the 30-year Treasury yield surged to a peak of 5.04% on Monday, the highest level since 2023. Tim Magnusson, Chief Investment Officer at Garda Capital Partners, stated that the bond market is at a turning point and that good news on the deficit is urgently needed to maintain current bond levels. Edward Yardeni, President of Yardeni Research, noted that the "bond market vigilantes" are ready to take action.

Fiscal concerns and uncertainty over tariff policies have made investors more cautious about their exposure to dollar assets. Bill Campbell, portfolio manager at DoubleLine Capital, mentioned that the firm is underweight on 20-year and 30-year U.S. Treasuries, believing that the U.S. shows no serious effort to control its debt. George Saravelos attributed market tensions to reduced appetite for U.S. assets and the difficulty in controlling high deficits through U.S. fiscal procedures.

Dalio suggested that the U.S. needs to quickly implement a combination of measures to reduce the deficit to 3% of GDP, including cutting spending, increasing revenue, and lowering real borrowing costs. As Congress continues to push forward with Trump's tax policies, the outlook for U.S. public finances grows increasingly bleak, and investors may soon face the consequences of the government's fiscal irresponsibility.