President-elect Donald Trump’s 2017 tax package is set to expire in 2025. Market professionals warn this could ignite significant turmoil in the bond market due to mounting concerns about the US deficit. A recent showdown between Trump and the bond market could resurface this year.
Investors fear the tax bill could introduce fresh volatility. The tax plan potentially adds billions to the US deficit over the next decade. This shows the kind of fiscal moves that worry bond investors concerned about sustainable government spending and the safe-haven status of US Treasurys.
Currently, the bond market has experienced calm, with yields declining amid cooler inflation data. However, market experts predicted that the 10-year US Treasury yield could reach as high as 5% as the tax bill progresses. This level has previously triggered significant stock sell-offs.
Tax bill’s bond market impact
Ed Yardeni, president of Yardeni Research, speculated that another substantial sell-off could transpire if the current tax bill advances in its current form. Padhraic Garvey, regional head of research for the Americas at ING, foresaw yields approaching 5%, particularly as borrowing needs rise, adding to market unease.
Peter Berezin, chief global strategist at BCA Research, estimated a 30% chance that the bond market could face a “nightmare scenario,” pushing the 10-year US yield past 6%. Such a scenario would necessitate Federal Reserve intervention to buy Treasurys to support government funding. The term “bond vigilantes” describes how the bond market itself reacts to policies threatening the safety of US Treasurys.
Currently, bond investors focus on two major concerns: high government borrowing and rising inflation, both of which jeopardize the US’s ability to meet its debt obligations. Trump’s administration aims to manage interest rates and maintain smooth bond auctions to avoid recession-triggering spikes in rates. Yardeni and Garvey both suggest that Trump might adjust elements of his tax bill to placate bond market concerns and avoid severe market reactions.
The progression and details of the tax package will be scrutinized, and its reception by the market will determine its ultimate impact.
