As the OBBB heads towards approval, it might be time for investors to think about what the fiscal implications are. The bill, which guts a number of key social benefits for some of the poorest Americans to pay for tax cuts, cleared a final procedural hurdle needed to begin debate on its content, with a final vote expected today.
Non-partisan analysts say the bill will add $3.4 trillion to the nation's $36.2 trillion debt pile over the next decade. When Trump started floating the basics of the bill on the campaign trail last year, bond yields began to grind higher, reaching a peak of 4.8% around the time he took office in January, as investors began to price in the impact of the legislation on the country's already-strained finances.
Benchmark 10-year Treasuries are currently yielding 4.25%, but they're up from around 3.6% last September, as the presidential race heated up, despite a jumbo half-point cut from the Federal Reserve.
The damage to 30-year notes has been even more severe. Thirty-year yields, the benchmark for mortgage rates, have risen to 4.8%, from below 4% in the same timeframe.
Pressure from Trump on Fed Chair Jerome Powell to cut rates has not let up, including numerous insults like calling him "too late" and "an average mentally person". But his latest social media post, calling for Powell to "resign immediately", has barely caused a stir in the markets.
There's no doubt that anticipation around today's non-farm payrolls data is white-hot.
Right now, traders are placing a 25% chance on the Fed cutting rates at the July meeting. They see at least two rate cuts over the remaining four meetings this year, which suggests that an NFP print that falls short of the expected 110,000 is, to an extent, baked in.
An index of U.S. economic surprises has fallen to its lowest in nine months in the last week, because data has generally missed expectations. An upside surprise in payrolls is generally not that common either. In the last year, the initial reading has only beaten expectations half the time. Beats and misses in other employment surveys are also not reliable indicators of what to expect from the more comprehensive government report.
Investors around the world are becoming less indulgent of governments' increasingly strained long-term finances, as deficits balloon and economic growth wobbles. As a result, long-term bond yields tend to bear the brunt of any concern they have, as witnessed in Wednesday's rout in the UK gilt market.
The British government's U-turn on its proposed welfare reform now means finance minister Rachel Reeves is at risk of busting her own self-imposed fiscal rules. The sight of a clearly upset Reeves in parliament, on TV, was enough to ignite one of the worst selloffs in 10-year gilts this year, which at one point, rivalled that of 2022.
Bond market reaction to Trump's bill may be muted for now. A massive spike in yields is no laughing matter, so it's worth remembering the bond vigilantes aren't dead, they're just resting.
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