Jennifer Sor
4 min read
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Bond investors have been in a panic this week about the deficit.
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The GOP tax bill could add trillions to the US budget deficit in the next 10 years.
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Here's why bond markets are dismayed by that prospect, and what it means for the economy.
The US budget deficit is the story markets are fixated on this week, with panicked bond investors sending yields spiraling higher and spooking the stock market.
The bond market is responding to the possibility that the GOP budget bill, which passed in a vote in the House of Representatives on Thursday morning, could add trillions to America's budget deficit.
The Treasury sell-off continued on Thursday after the bill was sent to the Senate, with the 30-year bond yield edging past 5.1%. The 10-year US Treasury yield rose past 4.6%.
So, why are investors so worried about the deficit?
There are three things top of mind for the so-called bond vigilantes.
The government has been growing the deficit — or the difference between what it spends and what it collects in revenue — for years. The US hasn't had a balanced budget since around the turn of the century. It ended its last fiscal year with a $1.8 trillion deficit.
Moreover, the US has been borrowing rapidly to fund high deficit spending. According to the latest data from the Treasury Department, the total federal debt balance has climbed to a record $36.2 trillion.
The GOP's "big beautiful bill" will eat into government revenue by slashing taxes. There are a range of estimates, but the version of the bill that advanced to the Senate this week could add up to $4 trillion to the deficit in the coming decade, according to a projection from the Tax Foundation.
This means even more borrowing will be needed to fund basic government functions, such as running social programs and the military.
According to Michael Brown, a senior research strategist at Pepperstone, investors are concerned that debt levels could be reaching unsustainable levels.
In the 2024 fiscal year, the government paid $881 billion on debt interest payments, according to the Congressional Budget Office. By 2035, total interest payments are expected to rise to $1.7 trillion a year, per the CBO's projections.
"I think the issue is more that starting to worry about whether we're getting close to or whether we are at a sort of tipping point," Brown told Business Insider. "It is not a new phenomenon. I think the problem is we're all now starting to wake up to the fact that nobody, certainly in the US, actually wants to do anything to get things under control."
