US government bonds drop as worries over Trump’s tax bill flare up

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US government bonds and stocks fell after a weak Treasury auction highlighted investor unease over the country’s rising debt burden, in the run-up to the passage of Donald Trump’s sweeping tax cuts through the lower chamber of Congress.

The 30-year Treasury yield rose 0.11 percentage points to 5.096 per cent in evening trading in New York, the highest level since late 2023, as the price of the bonds fell. It extended its rise to 5.12 per cent after the bill passed the House of Representatives by a single vote, up more than 0.2 percentage points this week.

The S&P 500 share index fell 1.6 per cent on Wednesday.

Trump’s proposal, which he has dubbed a “big, beautiful bill”, would extend many tax cuts made during his first term in 2017 and is forecast by independent analysts to add at least $3tn to US debt over the next decade.

House Speaker Mike Johnson spent most of the day Wednesday wrangling for votes and brokering deals with rival factions in Trump’s party.

The White House also invited the far-right Freedom Caucus to hear their concerns on Wednesday afternoon and dispatched National Economic Council director Kevin Hassett to meet with other Republicans at the Capitol.

“The meeting was productive and moved the ball in the right direction,” press secretary Karoline Leavitt said of the gathering at the White House.

The talks come just days after Moody’s stripped the US of its pristine triple-A credit rating on concerns over rising debt and deficits.

On Wednesday, the US sold the debt on its $16bn auction on 20-year Treasuries with a 5 per cent coupon, the highest interest rate for 20-year bonds at auction since the maturity was reintroduced in 2020.

Primary dealers — banks that are obliged to sop up any bonds not absorbed by other investors — purchased 16.9 per cent of the offering, compared with an average of 15.1 per cent, according to BMO Capital Markets.

“We had a soft 20-year auction and when combined with the focus on the budget deficit, the market has a bias towards higher yields,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

“Markets really have no appetite for duration here,” added Pooja Kumra, a rates strategist at TD Securities, referring to longer-dated securities.

“Especially in the case of the US, we expect all long-end auctions to be highly scrutinised by markets,” Kumra said, citing the budget bill.

European long-term borrowing costs edged higher on Thursday. The yield on a 30-year German Bund increased by 0.03 percentage points to 3.18 per cent, while the yield on the 30-year gilt rose 0.05 percentage points to 5.56 per cent.

Stock markets in the region also declined. The Stoxx Europe 600 index dropped 0.9 per cent, while Germany’s Dax, which has been hitting record highs, also shed 0.8 per cent.

Jay Barry, head of global rates strategy at JPMorgan, noted that “the equity market is finally starting to wake up to the fiscal issues facing the Treasury market”.

More than 95 per cent of the S&P 500’s member stocks were negative on the day on Wednesday. The financials, real estate and healthcare sectors were the benchmark index’s worst performers.

Compounding the decline was a sell-off in Big Tech stocks, after ChatGPT maker OpenAI said it had agreed to buy former Apple design chief Sir Jony Ive’s hardware start-up io for $6.4bn. The acquisition extends OpenAI’s bet on alternatives to smartphones.

News of the deal emerged around the same time as the results of the weak Treasury auction. Shares in Apple were down 2.3 per cent. Amazon, Nvidia and Microsoft all fell more than 1 per cent. The tech-heavy Nasdaq Composite was down 1.4 per cent.