Bond Markets Warn Congress Over Ballooning U.S. Debt/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ As Congress debates a tax bill that could deepen federal deficits, bond markets are flashing warning signs. Yields are rising, reflecting investor concern about the growing U.S. debt burden. Experts say Washington risks ignoring subtle signals—until the markets deliver a harsher message.
Bond Market Warning to Congress + Quick Looks
- Yields on 20- and 30-year bonds exceed 5%, reflecting rising investor caution.
- Moody’s downgrade sharpens market focus on U.S. fiscal trajectory.
- Investors demand higher returns, as national debt outlook worsens.
- Experts warn of future market shocks if Washington remains unresponsive.
- New tax bill could add trillions to deficit, worsening interest costs.
- House passed the bill, but Senate GOP resistance is building.
- Trump-aligned Republicans push spending cuts, but consensus is fragile.
- Treasury Secretary Bessent wants deficit-to-GDP under 3%, currently above 6%.
Bond Markets Warn Congress Over Ballooning U.S. Debt
Deep Look
As lawmakers sparred this week over a massive tax package projected to add trillions of dollars to the deficit, bond yields quietly surged. On Wednesday and Thursday, yields on 20- and 30-year Treasury bonds topped 5%, a level not seen since the early 2000s. The uptick wasn’t random—it was a subtle but serious warning from the bond market.
“For the first time in my professional life, we’re seeing a shift, with investors looking askance at Treasury debt,” said John Velis, macro strategist at BNY Mellon.
While Congress debates politically appealing tax cuts, markets are increasingly focused on the cost of carrying the debt. And the timing matters: ratings agency Moody’s recently downgraded the U.S. government’s credit outlook, amplifying investor concerns.
“The downgrade focused minds,” Velis noted. Investors already knew the fiscal outlook was shaky—but the rating action made it harder to ignore.
Why It Matters: The Cost of Debt Is Rising
As demand softens for U.S. Treasuries, the government must offer higher interest rates to attract buyers, meaning a growing portion of federal revenue will go toward interest payments instead of services or infrastructure.
That shift doesn’t yet spell crisis, but experts warn that the tipping point may arrive without clear warning—a failed bond auction, a sharper jump in yields, or a sudden market correction could send Washington scrambling.
“It’s an unstable equilibrium,” said Josh Frost, who oversaw debt management under President Biden. “Markets have been burned by policy U-turns. Selling and then buying back Treasuries isn’t attractive.”
Congress Plays a Dangerous Game
Despite the financial tremors, lawmakers appear unmoved. The House passed its “big, beautiful bill,” but it now faces skepticism in the Senate. Senator Ron Johnson (R-Wis.) is demanding deep spending cuts before allowing the legislation to proceed. He says the early pushback was dismissive but now claims to have the votes to block it unless changes are made.
Still, history suggests Congress will fall back on familiar behavior: tax less, spend more, and leave the fiscal reckoning for later.
“If the bond markets don’t think we’re serious,” warned House Budget Chair Jodey Arrington (R-Texas), “they’re going to dictate the terms.”
The Structural Problem: More Than a Political Issue
While markets remain relatively stable for now, some economists say the underlying issue is structural: the debt is growing faster than the economy, mainly due to rising costs from mandatory programs like Social Security and Medicare.
To illustrate: in fiscal year 2024, discretionary spending totaled $1.8 trillion—the exact size of the federal deficit.
Inertia vs. Action: Will Congress Wake Up?
Despite warnings, bond markets often stay quiet—until they don’t. Roughly 65–70% of U.S. debt holders are constrained from selling, says Janney Capital’s Guy LeBas, meaning their portfolios can absorb a lot of pressure before reacting.
“There’s a certain inertia behind the behavior of bond markets,” LeBas explained. “We gnash our teeth about unsustainable debt, but none of us are doing anything about it.”
Harvard economist and Lazard CEO Peter Orszag said the current moment reminds him that pessimists might finally be right.
“The deficit is twice as high, interest rates are dramatically higher,” Orszag said at the Milken Institute’s Global Conference. “I think it’s time to worry again.”
Yet few in Washington seem worried. As lawmakers look to extend tax breaks and make politically popular moves, the bill keeps growing. They’re giving back money they still plan to spend, and investors know it.
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