From: allin
The bond market reacted to new government spending legislation, leading to concerns about the national debt and its potential economic consequences.
Bond Market Reactions
The bond market experienced “chaos” following weak demand for newly issued 20-year bonds, pushing yields higher across the board [00:02:52]. The 10-year Treasury yield, a benchmark for borrowing costs like mortgages, spiked to a five-handle at one point [00:03:02]. This immediately impacted the stock market, with the S&P dropping 1.5% in 30 minutes and all three major indices down between 1.5% and 2% [00:03:16].
How Government Funding Works
The federal government funds its operations by issuing Treasury bonds, which are sold to individuals, companies, banks, and foreign governments [00:04:19]. When demand for these bonds is weak, the government must increase the interest rate it pays on them to attract buyers [00:04:54]. The recent weak demand for a modest $16 billion bond auction was seen as a significant negative signal by financial markets [00:05:00].
The “Big Beautiful Bill” (BBB)
The House passed the “Big Beautiful Bill” at the 11th hour, which makes the TCJA tax cuts permanent [00:03:27]. While estimated to increase long-run GDP by 60 basis points if all cuts are implemented [00:03:38], it is also projected to reduce tax revenue by 3 trillion and $5 trillion to the national debt over 10 years [00:03:45].
Concerns and Consequences
The bill is seen by some as “anti-Doge,” going against the desire for meaningful government reform and austerity [00:08:46]. The Congressional Budget Office (CBO) estimates often assume interest rates of 3.6% [00:06:31]. However, 30-year Treasury interest rates are currently over 5% [00:06:44]. For every incremental 1% above 3.6%, the government spends an additional 5 trillion to interest payments over 10 years [00:07:01].
[!WARNING|Recursive Debt Spiral] Increased interest rates lead to higher interest payments, forcing the government to issue more debt, which can further drive up interest rates. This is described as a “nonlinear relationship” that can quickly get out of control [00:07:19]. The market’s reluctance to buy government debt due to high deficits could lead to climbing rates, creating a massive problem [00:07:44].
Projected consequences include:
- Rising Interest Rates: The 10-year Treasury could pass 5% and the 30-year could reach 6.25% or 6.5% by year-end [00:10:01].
- Deleveraging from US Debt: Investors may sell US debt and instead own assets like gold and Bitcoin, which have recently spiked [00:10:36].
- Credit Downgrades: Ratings organizations may downgrade the United States [00:10:49].
- Inflationary Pressures: The bill contains inflationary aspects, potentially prompting the Federal Reserve to increase interest rates further [00:12:58].
- Impact on Average Americans: Higher rates will make it harder for people to buy homes and could lead to increased energy and Medicare prices [00:12:13].
Political Landscape
Some argue that the House was supposed to implement austerity measures and pass a “recision bill” to cut spending [00:11:15]. Instead, they passed a bill that adds $4 trillion to the debt [00:11:34]. There is a perceived lack of financial literacy in the House regarding the long-term impacts of such legislation [00:09:40].
Republicans are divided on spending [00:14:33]. While the bill permanently extends the 2017 tax cuts, which prevents a “massive tax increase” for the middle class [00:15:22], it falls short on spending cuts [00:15:00]. Some argue that making the tax cuts permanent is crucial for Republican prospects and the economy [00:16:32].
[!NOTE|Political Dynamics] The bill passed with a one-vote margin, highlighting the difficulty of achieving significant spending cuts when Democrats want more spending and many Republicans are “soft on spending” [00:14:41]. True austerity would require both parties to agree on painful changes, which is currently not happening [00:27:39].
Global Context: Japan and the Yen Carry Trade
The situation in Japan is seen as a cautionary tale [00:22:27]. Japanese bond yields have soared, and a recent 20-year Japanese bond auction had the worst demand since 1987 [00:24:17]. This indicates a massive selloff in credit and a potential unwinding of the “yen carry trade,” where investors leveraged Japanese bonds against US Treasuries [00:23:23].
Japan owns $1.1 trillion of US Treasuries [00:22:43]. If this trade unwinds, it would mean net sellers of over a trillion dollars of US Treasuries, further exacerbating the market’s reluctance to own US debt, leading to even higher yields and interest rates [00:23:42]. The only way to keep rates low would be for the Federal Reserve to buy these bonds, which would devalue the dollar [00:24:04].
Path Forward
Some hope that the Senate will make “technical maneuvering” changes to the bill to make it better [00:25:53]. Ultimately, the bond market will likely “sensitize this budget at real rates” (i.e., current market rates, not CBO’s assumed 3.6%), leading to a “very different risk exposure” [00:31:50].
[!INFO|Can We Grow Our Way Out?] One perspective is that technological advancements, particularly in AI and robotics, could lead to such massive economic growth and deflation that the current fiscal problem becomes manageable [00:32:26]. This would be an alternative to implementing politically unpopular austerity measures [01:26:02].
However, this growth hinges on abundant energy [01:25:12]. While the US currently has 1 terawatt of continuous power production capacity and aims for 2 terawatts in 15 years, China is already at 3 terawatts and scaling to 8 [01:27:52]. The bottleneck is the lack of manufacturing for essential energy components like natural gas turbines, which are primarily produced in China, leading to long waiting times [01:29:41]. Scaling energy production is seen as “this generation’s Manhattan and Apollo project” [01:30:14].