Stocks and bonds experienced turbulent trading on Monday as investors reacted to concerns about the U.S. government’s budget and its impact on the economy. The S&P 500 index initially declined but ended the day 0.1 percent higher, while bond yields rose before retracing some of their steps. The dollar also regained ground after a gauge of its value against other major currencies fell 0.7 percent.
One factor contributing to market jitters was a bill in Congress that would make President Trump’s 2017 tax cuts permanent, potentially adding trillions of dollars to federal debt. This has become a focal point of contentious congressional debate. Market participants were somewhat pacified by early signs of potential progress on negotiations aimed at further reining in government spending.
The financial markets have been uneasy due to the recent downgrade of the United States’ credit rating late on Friday. Concerns about the fiscal deficit, growing debt costs, and the implications of the proposed tax cut legislation were noted. With this move, all three major rating agencies no longer consider the United States qualified for their top credit ratings.
market reactions to budget concerns
Bridgewater Associates founder and billionaire Ray Dalio warned that Moody’s downgrade of the U.S. sovereign credit rating understates the threat to U.S. Treasurys. Dalio said the credit agency isn’t fully accounting for the risk of the federal government printing money to pay its debt, which could result in significant losses for bondholders due to the depreciating value of the money they receive.
“You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt,” Dalio said in a post. “They don’t include the greater risk that countries in debt will print money to pay their debts, thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting,” he added. Following Moody’s downgrade, U.S. Treasury yields surged, with the 20-year yield jumping to 4.995% and the 10-year note yield climbing to 4.521%.
Dalio emphasized, “Said differently, for those who care about the value of their money, the risks for U.S. government debt are greater than the rating agencies are conveying.”
The downgrade could affect everything from mortgage rates to investment portfolios. The average 30-year fixed mortgage rate rose, and credit-card APRs, auto loans, and private student loan rates are also expected to increase. Rising rates negatively affect bond prices, impacting the fixed-income segment of investment portfolios.
Stock markets can also suffer, evidenced by the initial reaction to the downgrade with major indexes, including the S&P 500, dropping more than 1% in early trading before rebounding.
