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When Republican congressmen first crafted their so-called “One Big Beautiful Bill Act”, some of US President Donald Trump’s advisers dubbed it the “Triple B” plan in internal meetings for brevity, or so I am told.
Future historians might well chuckle at the irony — and/or Trump’s lack of self-awareness. “Triple B”, after all, is also the tag that credit ratings groups use to designate the lower threshold of investment grade assets, before they become “junk”, with rising default risk.
And to many investors this “Triple B” Act, which will add over $3tn of debt in the next decade, represents a dangerous fiscal inflection point — particularly since Moody’s has just stripped away America’s AAA rating.
The issue is not simply that the Congressional Budget Office now projects the debt-to-GDP ratio will rise from 98 per cent to a record 125 per cent in the next decade. Nor that Moody’s predicts that the deficit will rise from 6.4 per cent last year to just under 9 per cent by 2035.
More alarming is that debt interest payments were $880bn last year, topping outlays on Medicare and the military. “Any great power that spends more on debt servicing than on defence risks ceasing to be a great power,” the historian Niall Ferguson says.
Worse still, that $880bn will almost certainly balloon. Most Treasuries were sold when rates were low. But 10- and 30-year rates have now risen above 4.5 per cent and 5 per cent, respectively. That could create a vicious spiral, unless Scott Bessent, Treasury secretary, can cut the debt and/or lower market rates.
Can he?
His team insists he can, for three reasons. First, they believe that America can grow out of its debt: Kevin Hassett, director of the White House National Economic Council, projects that tax cuts and deregulation will produce growth “way north” of 3 per cent later this year.
Additionally, they think debt will shrink because of spending cuts and revenue from policies such as tariffs (supplemented, some tell me, by possible taxes on foreign capital inflows).
And finally, they insist that global confidence in dollar assets remains high, since as Michael Faulkender, Bessent’s deputy, said this week: “Global bond flows remain strong, with high participation in the US Treasury market.”
Maybe so. Data last week showed that non-American holdings of Treasuries did indeed hit a record high of $9tn in March, nearly 12 per cent up on the year. But that was before Trump’s tariff shock at the beginning of April, never mind this new bill.
And on Wednesday a $16bn auction for 20-year bonds attracted lacklustre demand, prompting some investors to worry about a sentiment shift.
Thus far, this still seems muted, and a 4.5 per cent 10-year yield is hardly shocking by historical standards. But if you peer into the market entrails, there are at least five other subtle but worrying developments.
One is that long-term yields have recently kept rising inexorably, even as economic data has weakened. “That’s odd,” says Robin Brooks of Brookings, who interprets this as a sign that rising rates cannot be blamed merely on growth expectations.
Second, yields on inflation-adjusted bonds have also stayed flat, even as nominal yields have risen, suggesting that inflation expectations are not the key culprit either.
Third, the so-called term premia of Treasuries — a theoretical calculation of the risks around holding long-term versus short-term debt — have also risen inexorably, and more than in Europe. This offers “one indication that a fiscal risk premium may be forming”, Brooks notes.
Fourth, foreign demand for Treasuries is shifting. China used to hold the biggest stock. But it has quietly trimmed its purchases in the last decade, so its holdings now lag behind those of Japan and the UK, followed by the Cayman Islands, Canada and Luxembourg. This underscores the growing influence of potentially flighty hedge funds.
Last, the proportion of foreign bids in 30-year auctions (measured as “indirect” buyers) has recently slid below 60 per cent, compared with 70 per cent previously, as Torsten Sløk of Apollo notes. That also hints at rising global investor unease.
Let me stress that these five shifts do not necessarily portend a full-blown crisis; America still retains its exorbitant privilege. And Bessent has several tools to fight bond volatility, if it does erupt. These include debt repurchases or regulatory reforms to make banks act as market makers.
But the key point is this: the tectonic plates in markets are shifting, as fiscal unease swells; indeed some investors are now braced for 10-year yields of 5 per cent. And since Bessent confronts a new debt ceiling drama soon — and must sell over $9tn of debt in the next year — jitters could escalate.
That “BBB” tag around Trump’s giant bill could thus soon look decidedly unfunny. The only silver lining in this sordid saga is that if anything can curb Trump’s wilder instincts, it is probably those rising bond yields. Here’s hoping.
gillian.tett@ft.com
