President Donald Trump and his Cabinet nominees have been clear in direction, looking for lower taxes, higher tariffs, and greater growth.
But the bond market movements have been warning that the combination probably isn’t going to work, and Republicans in Congress have been listening.
Reuters reported that at a closed-door meeting of House Republicans, concerns about the estimated $4 trillion additional cost of extending reductions from the 2017 Tax Cuts and Jobs Act may be too much now.
Prices had been falling on the 10-year, 20-year, and 30-year Treasurys, although they did reclaim a little pricing power with the latest inflation report. There is a significant imbalance in the bond market because investors are losing faith that the U.S. will pay off Treasury instruments in the future.
"The buyers of our bonds are getting nervous that we're at the point that we cannot pay it back,” Republican House Representative Ralph Norman told reporters, according to Reuters. “That affects every one of us. If we can't sell bonds, guess what? We're in a ditch."
Treasury data from December 2024 shows total outstanding Treasury securities of roughly $35.95 trillion. Deficit spending adds to the total owed and requires financing from issuances of new Treasury securities. This is why questions about the debt limit are critical. Unless expanded, delayed, or extended, the government cannot issue more securities to borrow additional money, ultimately leading the U.S. into a constitutionally prohibited default.
“They should have been concerned in ’17 about deficits,” Michael Strain, an economist at the conservative-leaning American Enterprise Institute, told The Wall Street Journal. “They should be even more concerned in ’25 about deficits.”
“If we can convince the bond market that we’re actually getting serious about fiscal responsibility, that will send a virtuous signal to the bond market that will start lowering that 10-year,” said Representative Andy Barr (R, Ky) according to the Journal. “This is not austerity. This is not painful cuts. This is about lowering your mortgage payment.”
Perhaps a virtual signal will help, but markets have waited for decades to see change and might require more substantial actions than a promise to the future. The Journal noted that each 10-basis-point increase in Treasury borrowing costs translates into more than $300 billion in interest expenses over a decade.
So long as yields on the 10-year and other long-term Treasurys remain high or threaten to increase, there are also specific implications for commercial real estate. As the 10-year yield represents the risk-free rate, CRE lending will remain expensive and possibly increase in rates whether the Federal Reserve alters the federal funds rate or not.
The Republican approach counts on greater economic growth to smaller deficits. However, accelerated economic growth could bring higher inflation rates that the Fed would offset with increased interest rates.