Stocks, bonds, and the dollar slid in morning trading on Monday before rebounding in the afternoon. Nervy investors appeared sensitive to the latest wrangling over the government’s budget. The S&P 500 index recovered to trade roughly flat in the afternoon, ending the day 0.1 percent higher.
Bond markets also shuddered, with U.S. Treasury prices falling and their yields rising in morning trading before retracing their steps later in the day. The yield on 10-year Treasuries nudged lower to just under 4.5 percent. The dollar regained some ground, but a gauge of its value against other major currencies remained 0.7 percent lower.
One factor jarring markets is a bill in Congress that would make President Trump’s signature 2017 tax cuts permanent and could add trillions of dollars to federal debt. Alongside some lawmakers’ misgivings that the bill failed to materially cut the deficit, markets soothed on Monday amid early signs of potential progress on negotiations to further rein in spending. The United States’ mounting concerns about government debt have threatened to disrupt the relative calm in markets.
The tax cut legislation along with broader concerns about the fiscal deficit and growing debt costs have been significant focus areas. All three major rating agencies no longer consider the United States qualified for their top credit ratings. Wall Street is experiencing another volatile week as concerns mount over the United States’ national deficit and its standing in the global economy.
Investors are increasingly selling off U.S. government bonds, signaling a lack of confidence in the country’s financial stability amid the ongoing trade war. On Wednesday, the U.S. Treasury Department faced challenges during an auction for $20 billion worth of bonds, resulting in higher-than-expected interest rates. Yields on 30-year U.S. Treasuries have spiked above 5% this week, an unusual and unsettling surge.
This increase in bond yields raises interest rates on a variety of loans, impacting consumers and businesses alike. Historically, U.S. government bonds have been considered safe and stable investments, forming the backbone of the global financial system. However, uncertainty about the country’s economic policy and creditworthiness is leading investors to question their safety.
The European Central Bank has warned that President Trump’s tariff policies are creating significant economic and financial risks. “Frequent shifts and reversals in tariff policy, alongside significant changes in the geopolitical environment, could have major economic and financial impacts,” the central bank noted. Moody’s recently downgraded the creditworthiness of the United States due to the mounting national deficit, now approaching $2 trillion.
The credit agency criticized President Trump’s budget bill and tax cuts, which are expected to reduce government revenue and exacerbate the deficit.
Market jitters over budget negotiations
“We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration,” Moody’s stated.
The downgrade, coupled with the budget bill and the trade war’s uncertainty, is deteriorating investor confidence. Businesses and consumers are increasingly wary of the U.S.’s role in the global economy. Winnie Cisar, the global head of strategy at CreditSights, summarizes the sentiment: “The ‘sell America’ trade represents a whole change in narrative around U.S. economic exceptionalism.” Investors now perceive the U.S. as a riskier place to invest than it was six months ago.
Billionaire investor Ray Dalio sounded an alarm on Thursday about the soaring U.S. debt and deficits, advising investors to be cautious of the government bond market. “I think we should be afraid of the bond market,” Dalio said at an event for the Paley Media Council in New York. “It’s like …
I’m a doctor, and I’m looking at the patient, and I’ve said, you’re having this accumulation, and I can tell you that this is very, very serious. I can’t tell you the exact time, but looking over the next three years, give or take a year or two, we’re in a critical situation.”
The founder of Bridgewater Associates, one of the world’s largest hedge funds, has been warning about the ballooning U.S. deficit for years. Recently, investors have begun demanding lower prices to buy the bonds that cover the government’s massive budget deficits, pushing up yields on the debt.
Just last week, these rising concerns about the fiscal situation triggered a high-profile credit rating downgrade from Moody’s. On Thursday, the yield on the 30-year Treasury was around 5.14%. Rising financing costs, along with continued spending growth and declining tax receipts, have combined to send deficits spiraling, pushing the national debt higher.
In 2024, the government spent more on interest payments than on any outlay other than Social Security, defense, and health care. “We will have a deficit of about 6.5% of GDP — that is more than the market can bear,” Dalio stated. Dalio expressed skepticism that politicians would be able to reconcile their differences and lessen the country’s debt load.
In a party-line vote early Thursday, House members passed a bill that lowers taxes and increases military spending. The bill, which now goes to the Senate, could add trillions to the deficit at a time when fears of a flare-up in inflation due to higher tariffs are already weighing on bond prices and boosting yields. “I’m not optimistic.
I have to be realistic,” Dalio remarked. “I think it’s the essence of the challenge of our country that anything related to bipartisanship and getting over political hurdles … essentially means ‘give me more,’ which leads to these deficits.”
