US Borrowing Costs Soar Amid Trump’s Tax Bill and Moody’s Downgrade

The cost of long-term borrowing in the US soared since the late 2023 on Monday, 19 May. This comes amid downgrade in the country's credit rating and new fiscal legislation, thereby putting the bond markets under pressure, the Financial Times reported.

Yields on 30-year US Treasuries jumped to 5.04%, exceeding previous month’s tariff-induced highs, before closing at 4.91% by the end of the day. This development comes after Moody’s downgraded the US sovereign credit rating, highlighting the rising debt levels and widening deficits.

Tax Bill

The US Congress passed the new tax bill aimed at cutting hundreds of billions of dollars in new tax. Despite some intra-party resistance, Trump has urged the republicans to pass it. He declared on social media, “Republicans MUST UNITE behind, ‘THE ONE, BIG BEAUTIFUL BILL!”

As per analysts, if the legislation is enacted, the national debt could increase by $5.2 trillion in over a decade. As of 2024, federal deficit stands at 6.4% of GDP

“A bigger deficit means more Treasury issuance,” said Subadra Rajappa, head of US rates strategy at Société Générale. “Some investors are selling in anticipation of extra supply and inflation risk.”

Moody’s downgrade

Moody’s on Friday removed the US from the elite group of triple-A sovereign borrowers by questioning the country’s ability to manage its long-term fiscal obligations.

The credit agency also downgraded counterparty risk ratings for major financial institutions including JPMorgan Chase, Bank of America, State Street, and Wells Fargo.

“The downgrade is a stark reminder that the US should not take for granted its ‘exorbitant privilege’ of borrowing cheaply despite large deficits,” said Nicolas Trindade of Axa Investment Managers.

Despite these developments, analysts don’t expect a major selloff of Treasuries by institutional investors or central banks. As per the rules, bondholders are not allowed to sell US debt in response to such downgrades.

However, the downgrade highlights that US fiscal policy is losing its status as the world’s safest asset haven. “It’s another warning for a US administration already on bond vigilante alert,” said Pooja Kumra at TD Securities.