Longer-dated Treasury yields rose on Monday on concerns that a U.S. tax bill will increase the debt load by more than previously expected after Moody’s Investors Service on Friday also cut the United States' sovereign credit rating from the top “Aaa.”
The yields backed away from earlier highs, however, after they reached levels that are seen as attractive to some buyers and with no major economic releases this week expected to drive market direction. U.S. President Donald Trump's sweeping tax-cut bill won approval from a key congressional committee on Sunday and Republicans who control the U.S. House of Representatives will try to nudge the bill toward passage this week.
“That looks like it's going to add more to the deficit than perhaps initially forecasted when looking at a Republican-controlled House and Senate,” said Michael Lorizio, head of U.S. rates trading at Manulife Investment Management. “That's probably as much, if not a greater driver than the downgrade.”
Nonpartisan analysts say the bill could potentially add $3 trillion to $5 trillion to the nation's ballooning $36.2 trillion debt pile over the next decade. Moody's cited concerns about the nation's growing debt as a reason for the downgrade and said the fiscal proposals under consideration were unlikely to lead to a sustained, multi-year reduction in deficits.
The action was not much of a surprise to investors, given that Fitch and S&P Global downgraded the U.S. years ago.
“To the extent this announcement was not unexpected, and with investor positioning more neutral than it was in early April, we would expect significantly smaller moves than experienced last month,” JPMorgan analysts led by Jay Barry said in a report on Sunday.
That said, “over the longer term, this downgrade will likely result in higher interest expense,” JPMorgan added.
Treasury yields jumped in early April after Trump announced larger than expected tariffs on trading partners, increasing concerns over higher inflation and a sharper economic slowdown.
These concerns have since eased following Trump’s 90-day pause on most of the levies, and after the U.S. and China last week reached a trade agreement.
The 2-year note yield, which typically moves in step with interest rate expectations, fell 0.9 basis points to 3.974%.
The yield on benchmark U.S. 10-year notes rose 3 basis points to 4.469%, having earlier reached 4.564%, the highest since April 11.
The yield curve between two-year and 10-year notes steepened by 2 basis points to 49.5 basis points.
The 30-year bond yield gained 3.7 basis points to 4.934% after touching 5.037%, the highest since November 2023.
Fiscal concerns and trade developments are likely to be the prime market focus this week.
“We don't have very much else to focus on in the market this week because there's very little economic data,” said Lorizio. U.S. Federal Reserve officials speaking on Monday took on cautiously the ramifications of the latest downgrade of the U.S. government’s credit rating and unsettled market conditions as they continued to navigate a very uncertain economic environment.
Demand for longer-dated debt will be tested when the Treasury Department sells $16 billion in 20-year bonds on Wednesday and $18 billion in 10-year Treasury Inflation-Protected Securities on Thursday.