Market complacency is ‘through the roof’: Portfolio manager
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Diverging Reports Breakdown
Trump tax bill averts one debt crisis but makes future financial woes worse
The bill is projected to reduce tax revenues by $4.5 trillion, reduce spending by $1.2 trillion and cost 10.9 million people their federal health insurance over the next decade. It will add $3.4 trillion to the nation’s debt over thenext decade, nonpartisan analysts have estimated. The bill is seen as bad news for the U.S. bond market and the nation’s fiscal health. Some investors, however, worry the debt overhang could curtail the economic stimulus in the bill, which Trump refers to as the “One Big Beautiful Bill” The bill will be signed into law by President Donald Trump on July 3, the White House said on Thursday. The measure will extend Trump’s 2017 tax cuts, authorize more spending on border security and the military, make steep cuts in Medicare and Medicaid – and add trillions to the government’s debt. It is also expected to boost corporate earnings, raise stock prices and boost the economy in the short term, analysts say. The legislation also stokes economic growth by allowing businesses to fully expense equipment purchases.
Item 1 of 3 U.S. House of Representatives Speaker Mike Johnson speaks after the U.S. President Donald Trump’s sweeping spending and tax bill passes, on Capitol Hill in Washington, D.C., U.S., July 3, 2025. REUTERS/Umit Bektas
Summary Treasury yields rise amid fiscal concerns
Tax bill projected to reduce tax revenues by $4.5 trillion over a decade
Bill expected to boost corporate earnings, raise stock prices
NEW YORK, July 3 (Reuters) – President Donald Trump’s tax-cut and spending bill , which passed Congress on Thursday, averts the near-term prospect of a U.S. government default but makes America’s long-term debt problems even worse.
Republican lawmakers in the House of Representatives approved the bill that will extend Trump’s 2017 tax cuts, authorize more spending on border security and the military, make steep cuts in Medicare and Medicaid – and add trillions to the government’s debt. Trump is expected to sign the bill into law.
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As part of the tax package, lawmakers raised the U.S. government’s $36.1 trillion borrowing limit that it was projected to hit later this summer by $5 trillion – a move that will assuage concerns over a possible default on U.S. debt.
Analysts had estimated the so-called X-date, when the Treasury would no longer be able to pay all of its obligations without an increase or suspension of the debt limit, could have occurred at the end of August or in early September.
Longer term, however, the bill has largely been seen as bad news for the U.S. bond market and the nation’s fiscal health. It will add $3.4 trillion to the nation’s debt over the next decade, nonpartisan analysts have estimated.
That would exacerbate concerns over additional bond supply and dwindling demand for U.S. Treasuries that have been a key driver of financial markets in recent months.
“The bill contributes to some of the structural concerns around Treasuries, with respect to No. 1, ongoing fiscal deficit and elevated debt levels, and No. 2, inflation,” said Mike Medeiros, macro strategist at Wellington Management.
BlackRock warned on Monday that foreign buyers were already souring on American debt. There was a real risk that demand for the $500 billion in debt the U.S. issues every week will fall even more and push borrowing costs higher.
“We’ve been highlighting the precarious position of the U.S. government’s indebtedness for some time now, and, if left unchecked, we view debt as the single greatest risk to the ‘special status’ of the U.S. in financial markets,” BlackRock’s investment managers said in a note.
The bill is projected to reduce tax revenues by $4.5 trillion, reduce spending by $1.2 trillion and cost 10.9 million people their federal health insurance over the next decade, according to estimates from the Congressional Budget Office.
The legislation also stokes economic growth by allowing businesses to fully expense equipment purchases as well as research and development costs, and provides other tax breaks.
Some investors, however, worry the debt overhang could curtail the economic stimulus in the bill, which Trump refers to as the “One Big Beautiful Bill”.
Campe Goodman, fixed-income portfolio manager at Wellington Management Company, said he expected the bill to add as much as 0.5% to economic growth next year, but that the market was too complacent about the long-term risk of higher borrowing costs.
“We believe the One Big Beautiful Bill will accelerate corporate earnings growth, which ultimately will drive equity values,” said Ellen Hazen, chief market strategist at F.L. Putnam Investment Management. “But this could lead to higher-for-longer Treasury rates, making many fixed-income investments somewhat less attractive over the longer term,” she said.
Benchmark 10-year Treasury yields were higher on Wednesday after days of decline, with the increase partly attributed to fiscal concerns agitating investors. Yields rise when bond prices drop.
Andrew Brenner, head of international fixed income at National Alliance Capital Markets, said Wednesday’s selloff was a sign that so-called bond vigilantes – investors who punish bad policy by making it prohibitively expensive for governments to borrow – were circling the market.
“The Vigilantes want to see more deficit cutting… Their view is Trump and Congress have not done enough,” he wrote in a note to clients on Wednesday.
DEBT LIMIT RELIEF
By raising the U.S. federal borrowing limits, the bill removes the low-probability but high-impact risk of a U.S. debt default, which could have catastrophic consequences for global markets.
In recent weeks, the interest rate on some Treasury debt due in August had risen more than yields of short-term Treasury bills coming due around the same time, a sign investors were getting nervous about the approaching X-date.
“I think (the passage of the bill) takes some of the debt ceiling risks away so yields on bills maturing in August might come down a little bit,” said Vinny Bleau, director of fixed-income capital markets at Raymond James in Memphis.
Overall, the reaction of the bond market to the bill approval has been relatively muted. An expansion in deficits had already been priced in with Trump’s return to the White House in January, and investor focus has shifted in recent weeks to economic growth concerns.
To be sure, many market participants said the passage of the bill was secondary to other key market drivers. The benchmark S&P 500 Index (.SPX) , opens new tab closed at a record high on Wednesday, lifted by gains in tech stocks and progress on U.S. trade agreements.
A slowdown in economic data in recent weeks has also bolstered expectations for interest rate cuts by the Federal Reserve this year, contributing to optimism in stocks and bonds, although a blowout jobs report on Thursday dampened hopes for any immediate easing in monetary policy.
“It’s not going to be the overall driving factor (for the market),” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut.
“It’s earnings first and then the Federal Reserve,” he said.
Reporting by Carolina Mandl, Getrude Chavez-Dreyfuss, Chuck Mikolajczak, Carolina Valetkevitch, Davide Barbuscia; Editing by Dawn Kopecki, Lincoln Feast
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US debt ceiling crunch threatens to roil complacent stock market
The S&P 500 (.SPX) is up more than 9% this year and stands around its highest point since August 2022. For now, equity investors seem unflustered as the deadline to avoid a catastrophic first-ever U.S. government default draws nearer. But with equities trading at valuations that are expensive relative to history, some strategists are warning that stocks could become rocky in the days leading up to the so-called X-date of June 1. “Coming into this week, the market looks more vulnerable to volatility around the debt ceiling,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “It’s something that certainly could be repriced into markets if a snag does hit over the course of the next week or so,” he said. “If the market does not place a high probability on a resolution by early next week we would anticipate equity volatility to move higher alongside T-Bill yields and credit default swaps,” he added.
NEW YORK, May 23 (Reuters) – Strategists at some of Wall Street’s biggest banks are sounding increasingly worried about potential market fallout from the standoff over raising the U.S. debt ceiling, even as stocks continue grinding higher.
The S&P 500 (.SPX) , opens new tab is up more than 9% this year and stands around its highest point since August 2022. For now, equity investors seem unflustered as the deadline to avoid a catastrophic first-ever U.S. government default draws nearer, in part because most are confident lawmakers will eventually reach a deal.
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But with equities trading at valuations that are expensive relative to history and the Federal Reserve’s policy rate at a 15-year high, some strategists are warning that stocks could become rocky in the days leading up to the so-called X-date of June 1, which the Treasury Department has said is the day the federal government could run out of money to pay its bills.
“Coming into this week, the market looks more vulnerable to volatility around the debt ceiling,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. “It’s something that certainly could be repriced into markets if a snag does hit over the course of the next week or so.”
President Joe Biden and House Speaker Kevin McCarthy ended discussions late Monday with no agreement on how to raise the U.S. government’s $31.4 trillion debt ceiling and will keep talking with less than two weeks before a possible default.
CALM FOR NOW
For now, investors believe an agreement is likely, even as the deadline approaches. A survey of global fund managers from BofA Global Research last week showed that 71% believe a deal to raise the debt ceiling will be reached before the X-date.
Yet some worry the current market and economic backdrop may leave stocks more vulnerable than in 2011, when a debt-ceiling related standoff led to a historic downgrade of the U.S. credit rating.
While stocks plunged almost 20% during the 2011 episode, higher inflation, richer valuations and tighter monetary policy could mean the current market environment might be worse for risky assets now, according to strategists at JPMorgan.
Indeed, the S&P 500 is trading at about 18.4 times forward earnings estimates, compared with its historic average of 15.6 times, according to Refinitiv Datastream. That measure stood at just over 12 times in the summer of 2011, according to JPMorgan.
Other benchmarks are also less favorable: The Fed’s most aggressive rate hiking cycle in decades has left interest rates in a range of 5% to 5.25%, compared with near zero in 2011. Inflation stands at 4.9% annually, compared with 3.6% in 2011, while S&P 500 forward annual earnings are estimated to rise 5.7% versus 15.3% that year, the bank’s report showed.
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The bank’s analysts also pointed out that, as in 2011, even a close call could be enough to roil markets.
While they ultimately expect a resolution, “the journey to that end could … drive significantly higher market instability than appreciated by the market currently,” JPMorgan wrote.
UBS Global Wealth Management, meanwhile, wrote last week it expects the S&P 500 to fall by more than 10% if lawmakers fail to reach an agreement before the X-date, though that is not its base case.
“Historically, equity volatility does not show signs of stress until the X-date approaches,” the firm said in a separate note last week. “If the market does not place a high probability on a resolution by early next week we would anticipate equity volatility to move higher alongside T-Bill yields and credit default swaps.”
Despite the relative calm in the VIX, there have been some large options trades recently that would pay out if the fear gauge jumped to record highs over the next few months – indicating worries over a steep market decline, said Henry Schwartz, global head of client engagement, data & access solutions at Cboe Global Markets.
“It almost points to a binary view … either they settle it (the debt ceiling issue) and the VIX stays at 17 or we actually default and the VIX goes to 90,” Schwartz said.
Reporting by Lewis Krauskopf; Additional reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Sam Holmes
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