How bond markets will react to the Senate megabill

Politico

8 hours ago

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Quick Fix
Bond investors got spooked by the potential fiscal consequences of President Donald Trump's 'big, beautiful bill' as it moved toward passage in the House last month. With Senate Finance Chair Mike Crapo poised to release his spin on major tax cuts this week, markets could see a repeat.
The fault lines that the Idaho Republican will have to navigate to find common ground on tax policy have been tremendous, Brian Faler reports.
Fiscal hawks want to phase out Biden-era clean energy tax credits that key Republicans — including Alaska's Lisa Murkowski and North Carolina's Thom Tillis — have sought to preserve. Crapo has been skeptical that his members will sign off on the $40,000 cap on state and local tax deductions that House members from blue states have described as a red line. Sen. Josh Hawley (R-Mo.) has been fighting to limit cuts to Medicaid, which he's described as politically toxic. Sen. Ron Johnson (R-Wisc.) wants to see spending brought down to pre-pandemic levels and would prefer the Senate consider separate bills rather than a single big beauty.
Why does that matter to markets? That dissension should be music to the ears of bond investors who are hoping that gridlock will force Republicans to rework Trump's megabill into something that's more fiscally sustainable. But there's a difference between hoping for something and being hopeful, and few on Wall Street anticipate that GOP leaders will make changes that take the U.S. off its current fiscal trajectory.
'The best outcome for the bond market is they can't agree,' said Brij Khurana, a fixed-income portfolio manager at Wellington Management. If that forces Congress into passing two bills through reconciliation — something that Khurana assigned a 25 percent likelihood, at best — 'the market would assume that you get a lot less spending.'
The more likely scenario is that Trump's megabill survives more or less intact. Even if Republicans negotiate changes that reduce spending and push up revenue — or make the bill less reliant on painful offsets that lawmakers could nix in the future — 'no one is expecting' deficits to fall to Treasury Secretary Scott Bessent's goal of 3 percent of gross domestic product, Khurana said. (The Congressional Budget Office estimates that deficits ran at about 6.6 percent during the 2024 fiscal year, nearly three percentage points more than what the U.S. averaged over the previous 50 years.)
Big deficits force bond investors to absorb a larger supply of government debt securities, which leads to higher yields and higher interest rates. Major players in fixed-income markets, including BlackRock, have been scaling back their investments in longer-term government debt.
On Friday, the Yale Budget Lab estimated that the bill could result in slightly higher growth through 2027, but that the economy would ultimately weaken in the face of larger deficits and higher interest rates. The yield on 10-year Treasury notes — which is used to price mortgages and other forms of consumer debt — would be 1.2 percentage points higher by 2054, according to the Budget Lab's projection.
With Trump dialing up pressure on Republican hawks to cave on the megabill, Khurana said few believe the Senate will do much to address the fiscal outlook.
'People are very wary of what the Senate is going to do with the reconciliation bill,' Khurana said. 'There's such a narrow majority in the House that in some ways, they have to accommodate everyone's spending dreams compared to actually maintaining fiscal discipline.'
IT'S MONDAY — It is a jam-packed week. I'm in Washington for a few days. If you have insights on how the White House is thinking about bond markets and want to catch up, you can reach me at [e-mail].
Driving the Week
Monday … The Securities and Exchange Commission's Crypto Task Force will meet to discuss decentralized finance at 1 p.m. …
Tuesday … The NFIB's Small Business Optimism Index is out at 6 a.m. … Housing and Urban Development Secretary Scott Turner testifies at House Appropriations at 10 a.m. … House Financial Services holds a markup on crypto market legislation at 10 a.m. … Senate Foreign Relations holds a hearing on the nominations of Jacob Helberg to be undersecretary of State for economic growth, energy and the environment; Andrew Puzder to be U.S. representative to the European Union; Paul Kapur to be assistant secretary of State for South Asian affairs and Benjamin Black to be CEO of the U.S. International Development Finance Corp. at 10 a.m. …. Senate Agriculture holds a hearing on the nomination of Brian Quintenz to chair the Commodity Futures Trading Commission at 3 p.m. …
Wednesday … The Consumer Price Index for May is out at 8:30 a.m. … Treasury Secretary Scott Bessent testifies at House Ways and Means at 10 a.m. … Turner testifies at a Senate Appropriations subcommittee meeting at 3:30 p.m. … Bessent testifies at a Senate Appropriations subcommittee meeting at 3:30 p.m. …
Thursday … The Producer Price Index for May is out at 8:30 a.m. … Acting Internal Revenue Service Commissioner Michael Faulkender speaks at a research conference hosted by the IRS, Urban Institute and Brookings Institution Tax Policy Center at 8:30 a.m… Bessent testifies at Senate Finance at 10 a.m. … Senate Banking holds a hearing on the nominations of Ben DeMarzo to be assistant HUD secretary for congressional and intergovernmental relations; Craig Trainor to be assistant HUD secretary for fair housing; Jovan Jovanovic to be chairman of the U.S. Export-Import Bank; Francis Brooke to be assistant Treasury secretary for international trade and development; and David Peters to be assistant Commerce secretary for export enforcement at 10 a.m. …
Friday … University of Michigan's preliminary consumer sentiment reading for June is out a 10 a.m. …
Battle Royale — Elon Musk's feud with the Trump administration has been simmering for months — the Tesla founder and Bessent reportedly got into a physical altercation in the White House in April, per WaPo — but a shaky detente between the two billionaires held through the weekend after aides for both men spoke on Friday, per Dasha Burns and Julia Marsh.
— For Musk, there's a fortune at stake: 'Musk's businesses stood to reap potentially limitless gains from his 130 days as Trump's cost-cutter-in-chief,' Declan Harty reports. 'Now those same arms of government — the vast, powerful federal bureaucracy that Trump has openly portrayed as a weapon to be wielded against his enemies — are potential threats to Musk's business empire.'
— Musk may have been the face of slash-and-burn spending cuts in the early days of Trump 2.0. Office of Management and Budget Director Russ Vought is the engine, Sophia Cai and Megan Messerly report.
Big week for trade — Following last week's call between Trump and Chinese President Xi Jinping, representatives from both countries will hold trade talks in London today, Daniel Desrochers reports.
ICYMI — From me: 'Trump wants a manufacturing boom. The industry is buckling.'
At the regulators
Trump's OCC chief preps for stablecoin law — Acting Comptroller of the Currency Rodney Hood says his agency is ready to hit the ground running as Congress moves closer to handing the OCC major new authority to oversee stablecoins. The bipartisan legislation is expected to reach the Senate floor this week.
'We will have a team of examiners in place that will be ready to act when the legislation is passed,' Hood told POLITICO.
Hood also brushed aside concerns, which have been raised by Democrats, over potential conflicts of interest if the OCC, a component of the Treasury Department, were to begin regulating Trump's family cryptocurrency business. The company, World Liberty Financial, earlier this year launched its own stablecoin, known as USD1.
'All applications will be reviewed based on their merit, as we do with anything,' Hood said in an interview with Michael Stratford. He added that the OCC would apply the appropriate standards 'regardless of who's issuing the application' to become an approved stablecoin issuer.
Bowman lays out her vision — Newly confirmed Federal Reserve Vice Chair for Supervision Michelle Bowman said her views on bank supervision and regulation would be driven by 'pragmatism,' Stratford reports.
New IG, who this — Fed Chair Jerome Powell appointed Michael Horowitz, the Justice Department's longtime watchdog, to serve as the new inspector general for the central bank and the Consumer Financial Protection Bureau, according to Michael.
A progressive pitch for a post-Trump era: Seth Frotman, the former general counsel of the CFPB, and Jeremey Kress, an associate professor of business law at the University of Michigan, are out this morning with a new article in Democracy Journal arguing that progressives should capitalize on Trump's erosion of the independence of federal financial regulators like the FDIC and SEC.
Democrats should resist the urge to seek to reinstate the old system that aimed to keep regulators insulated from the White House after Trump leaves office, Frotman and Kress write, arguing that such 'independence' was often 'code for regulatory capture and special interest influence.'
'When progressives are returned to power, they will face a choice: fight to restore a broken system that never worked for working people, or learn to use the centralized power Trump created,' they write. 'We believe they should maintain control over financial regulators and redirect these agencies toward consumer protection, fair markets, and financial stability.'
Talking Points
With the Senate likely to vote on the stablecoin legislation this week, Andrew Olmem, the managing partner of Mayer Brown's Washington office, says he thinks the measure could get as many as 70 'yes' votes.
'It shows that the Senate can work,' said Olmem, who served as deputy director of the National Economic Council during Trump's first term. 'Both parties see a regulatory gap. And they have worked through the issues to get crypto and non-crypto companies lined up for this bill. I think it's a bill that's going to get well into the 60s, maybe 70, [yes votes].'
It hasn't been an easy ride. Last month, pro-crypto Democrats briefly pulled their support for the measure, which creates a regulatory regime around dollar-pegged digital tokens, as Trump family members cashed in on lucrative crypto enterprises. Most Democrats came back on board for a key procedural vote after securing changes that address data sharing and foreign crypto firms.
Progressives led by Sen. Elizabeth Warren (D-Mass.), along with financial watchdog groups, have said the bill is a giveaway to crypto firms that have amassed new influence in the early days of Trump 2.0. Even so, 18 Democrats sided with Senate Republicans in the most recent procedural vote.
'Normally, Democrats would say we need to have a good, strong regulatory regime. So it's a natural place for Democrats. Republicans also recognize that there needs to be legal certainty, so it provides a stable place for innovation,' Olmem said. 'Both sides have their own interest in pursuing [and] advancing the bill.'
On the Hill
Full steam — From Katherine Hapgood: 'Senate Banking Chair Tim Scott (R-S.C.) on Friday released his panel's contribution to the GOP's megabill, despite concerns from his own members that several provisions won't be allowed under Senate rules.'
— The legislative proposal includes language that would claw back funds from a Biden-era housing program intended to make affordable housing more energy-efficient and climate-resilient, Katy O'Donnell reports.
Pushback — The Institute of International Bankers is dialing up opposition to a provision of the big beautiful bill that would raise taxes on foreign firms that are based in countries that the U.S. deems 'discriminatory.'
'As passed by the U.S. House of Representatives, Section 899 will stifle foreign direct investment, risk financial market disruptions, and endanger American jobs in states and communities across the country,' said IIB CEO Beth Zorc. 'We encourage the Senate to address concerns about this provision and to consider modifications that will help preserve international investment in American jobs and businesses.'
Jobs report
Adam Rice is rejoining the American Securities Association as chief public affairs officer. He most recently was a managing director at FTI Consulting. — Declan Harty