US borrowing costs to 5% after massive tax cuts approved

The yield on 30-year US government bonds, often referred to as treasuries, surged to 5.03% on Monday, reaching its highest level since November 2023. The increase follows a contentious vote where the House Budget Committee narrowly approved a $3.8 trillion tax cut package proposed by former President Trump.

The move has significantly rattled financial markets. The dollar index—a key measure of the US currency’s performance against a basket of other currencies—dropped 0.77%, marking an 8% decline since the beginning of the year. Additionally, US stock futures dipped, while European indices like the FTSE 100 and Stoxx 600 saw declines of 0.61% and 0.65%, respectively. Concerns over long-term fiscal sustainability appear to have spooked investors, adding to existing volatility.

The tax package, described by Trump as the “big, beautiful bill,” faces criticism not only for its scale but also for the absence of substantial offsetting reductions in government spending. Moody’s, the credit rating agency, recently downgraded the United States’ credit rating from AAA to Aa1, citing a significant increase in debt and interest payment ratios. This is the first downgrade by Moody’s since it began rating the US in 1917. It follows similar actions taken by Fitch and S&P in 2023 and 2011, respectively.

Financial analysts are warning that the high deficits could destabilise the nation’s creditworthiness. In 2024, the US budget deficit accounted for 6.4% of GDP, and Moody’s has forecasted this could balloon to nearly 9% by 2035. The debt-to-GDP ratio, already at 98% last year, could rise to a staggering 134% within a decade, according to Moody’s projections.

Market participants are closely scrutinising these developments. Deutsche Bank noted, “The diminished appetite for US assets, along with entrenched fiscal rigidity, is creating significant nervousness.” Limited willingness among global investors to underwrite this level of debt may intensify borrowing pressures. UBS echoed these concerns, stating, “Budget deficits at this scale are unsustainable. While the breaking point may not arrive for several business cycles, structural changes are imperative.”

Despite these warnings, the role of the US dollar as the global reserve currency continues to provide a cushion. Its pre-eminence underpins confidence in US assets, even amidst strains on the nation’s fiscal outlook. However, with long-term interest rates already climbing, economists are questioning how much longer America can sustain cheap borrowing conditions when demand for its debt begins to wane.

The controversy surrounding these tax cuts underscores the wider debate on economic priorities. Supporters argue that the cuts will stimulate growth and job creation, while critics highlight the potential risks to financial stability and global economic confidence. How policymakers address these tensions will shape not just America’s economy but also its position in the global financial system.