US Treasury markets flash warning signs about Trump’s Big, Beautiful Bill

The US House of Representatives passed a tax and spending bill on Thursday that will enable US President Donald Trump to fulfill several of his presidential campaign pledges. But the so-called “Big, Beautiful Bill” is also expected to increase the US federal deficit by $3.8 trillion over the 2026-2034 period, according to the US Congressional Budget Office. And markets didn’t like that.

What is the Big Beautiful Bill?

The tax cut and spending bill passed by the US House is officially called the One Big Beautiful Bill Act. The bill officially increases the US federal debt limit by $4 trillion, effectively ending the debt limit suspension period that ran through January 1, 2025.

The bill intends to provide general tax cuts to workers and families through numerous tax deductions and relief, including the “No Tax on Tips” and “No Tax on Overtime” provisions that include above-the-line deductions for labor income earned through tips and overtime. Specific tax cuts also target rural communities in the US and small businesses, also known as “Main Street.” 

More significantly, there are big tax cuts at the state and local level through a raise in the SALT deduction cap from $10,000 to $40,000 for individuals and couples, which mainly benefits those based in high-income and high-tax states like New York or California.

Also included in the bill are terminations of tax credit provisions for clean and renewable energy emissions on vehicles, residences and businesses, and some limitations of tax credit and Medicare access for immigrants.

When will the Big Beautiful Bill go into effect?

The One Big Beautiful Bill Act has been passed by the US House of Representatives but still has to go through the US Senate before it is sent to the White House and signed by President Trump. 

The Republican party holds a 53-47 majority in the Senate, and needs 50 votes to get the bill passed, as they own the tiebreaker through the US Vice President’s right to act as ex officio president of the Senate. In that case, JD Vance would surely vote in favor of the tax bill.

When will the Senate vote on the Big Beautiful Bill?

President Trump expressed the urgency for the passing of the bill in a post on X. “Now, it’s time for our friends in the United States Senate to get to work, and send this Bill to my desk AS SOON AS POSSIBLE! There is no time to waste,” he wrote.

US Senate Majority Leader John Thune wants the bill to be approved by July 4, saying that the Independence Day holiday deadline is “the goal and aspiration.” 

Nonetheless, the tax bill’s approval could be delayed as many Republican senators are vowing to make changes to the House-approved bill.

Fiscal hawks like Wisconsin’s Ron Johnson and Kentucky’s Rand Paul are expected to vote against the bill unless “beefed-up spending reductions” are included, according to Politico. 

“I’m hoping now we’ll actually start looking at reality,” Senator Johnson told Politico. “I know everybody wants to go to Disney World, but we just can’t afford it,” he said.

Which Republicans voted against the Big Beautiful Bill?

The Senate vote is expected to be tight, and so was the US House one. The One Big Beautiful Bill Act was passed by a difference of just one vote, 215-214. Republicans control the House with a 220-212 majority, so they could only afford to lose three representatives from their ranks to get the job done. 

In the end, only two Republicans voted against the bill, Thomas Massie (Kentucky) and Warren Davidson (Ohio). Rep. Andy Harris (Maryland) voted “present,” and Reps. David Schweikert (Arizona) and Andrew Garbarino (New York) did not vote.

What does the Big Beautiful Bill mean for the bond markets?

The tax cuts implemented by the One Big Beautiful Bill Act will add to the already gargantuan deficits that the US federal budgets usually run with. The sustainability of the US debt has been increasingly questioned by market players, with the most recent example being the Moody’s credit downgrade of US sovereign debt to Aa1.

On Wednesday, the US 20-Year Bond auction also flashed some warning signs after being settled above 5%, the highest levels since November 2023. Capital Economics does not foresee a “fiscal induced crisis in the Treasury market. But unless the [tax] bill is watered down by the Senate, there is clearly a risk of yields rising even further,” they write in their daily report.

Why are US Treasury yields rising?

Usually, US Treasury bonds have been the ultimate safe-haven asset, as the market has supreme belief in the ability of the US federal government to fulfill its debt obligations. The rise of federal deficits in most fiscal years and the growing interest costs of the US government debt (currently sitting at $36.2 trillion according to the Congressional Budget Office) have cast doubts on this, and were the main reasons cited by Moody’s last Friday when they downgraded its credit rating.

Government bond yields move inversely to their price. When demand for bonds is high, yields normally fall and governments can finance their debt at a more controlled cost. Conversely, when demand for bonds falls, yields rise, which means the government has to pay higher interest to bondholders to attract them and sell its bonds.

What does a steepening yield curve mean?

This is the situation where the US Treasury bonds – the ones with the longest maturity dates, from 20 to 30 years – are right now. While shorter-term bills and notes yields are decently stable, having treaded water year-to-date, the US 30-year Treasury yields are well on the rise, sitting above 5% at the time of writing after having started the year at 4.77%.

US 1-year, 10-year and 30-year Treasury yields (year-to-date)

This means the longer end of the US Treasury yield curve is getting higher while the shorter end is stable, which implies a steepening yield curve. A steep yield curve is typical when markets expect higher short-term interest rates in the future. 

That is a surprising development given that the Federal Reserve cut its benchmark rate by 100 basis points in 2024, and is still expected to cut some more in the second half of 2025. Despite delays in that decision, which prompted President Trump to call Fed Chairman Jerome Powell “Too Slow Jerome”, 50 basis points of cuts between next September and December decisions are still priced in, according to the CME FedWatch Tool. 

The US Treasury market might be telling us more about future rate decisions than any Fed official does. The Trump administration needs lower yields and interest rates to finance its Big Beautiful Bill and, for now, they are not getting any of these.