Treasury Yields Rise as Fiscal Worries Weigh on Stocks

Wall Street investors remained cautious as debates in Washington over the ballooning U.S. budget deficit intensified. Concerns that the nation’s growing debt could undermine its reputation as a global safe haven sent stocks, bonds, and the dollar lower. The rising uncertainty has led to renewed scrutiny of America’s fiscal path, which many fear could carry long-term consequences for the economy.

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After climbing from its April lows, the S&P 500 declined for a second consecutive session. Investor confidence was rattled not only by fiscal issues but also by a report suggesting Israel might be preparing for potential military action against Iran. Although no official decision has been confirmed, the headline was enough to boost oil prices and dent risk sentiment. Stocks momentarily pared their losses following a Bloomberg report that the European Union is preparing to propose a revised trade deal to the U.S.

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Bond markets saw notable activity as traders bet on further increases in long-term Treasury yields. The yield on the 30-year Treasury rose above 5%, indicating that investors are demanding higher returns to hold long-dated government debt. The uncertain economic outlook is prompting increased use of options to hedge against potential downside risks. This surge in bearish positioning reflects the mood on Wall Street, where strategists at major firms like Goldman Sachs and JPMorgan are raising their forecasts for future yields.

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On the legislative front, House Speaker Mike Johnson announced that Republicans had reached a deal to raise the cap on the state and local tax (SALT) deduction to $40,000. This move could help resolve one of the lingering issues in President Donald Trump’s sweeping economic bill. The agreement signals progress on the legislation, though other key matters are still under negotiation.

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The sense of urgency around America’s fiscal state intensified after Moody’s Ratings downgraded the country’s credit outlook, stripping it of its top-tier AAA status. The downgrade served as a warning: unless the government reins in spending and reduces its deficit, the risk profile of lending to the U.S. could increase. That would make borrowing more expensive not just for the government, but also for consumers and businesses across the country.

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Former Treasury Secretary Steven Mnuchin added his voice to the growing concern, emphasizing that the budget deficit presents a greater threat than trade imbalances. Speaking at the Qatar Economic Forum, Mnuchin said, “I’m very concerned. The budget deficit is a larger concern to me than the trade deficit. I hope we get more spending cuts — that’s something extremely important.”

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On the markets, the S&P 500 dropped 0.5%, while the Nasdaq 100 fell 0.2%. The Dow Jones Industrial Average slid 0.8%, reflecting broad unease among investors. Meanwhile, the yield on the 10-year Treasury rose four basis points to 4.53%, and the U.S. dollar weakened, with a currency index falling 0.4%. On the international front, the South Korean won strengthened to a six-month high amid speculation that trade talks with the U.S. included discussion of the currency’s direction.

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Thierry Wizman, a strategist at Macquarie, suggested the Moody’s downgrade was not solely about debt levels but also a reflection of dysfunction in U.S. policymaking. “The downgrade was as much an indictment of the breakdown in institutional policymaking norms as it was a critique of the high debt load,” he explained.

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Congress continued to work through the night to push through Trump’s economic bill, with the House Rules Committee debating the legislation into the early hours of Wednesday. Johnson has set a Thursday deadline for the House to advance the bill, and Republicans are preparing to unveil a revised version that tackles unresolved elements, including the SALT deduction.

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Chris Low, chief economist at FHN Financial, summed up the budget situation with a mix of realism and irony. “The budget is like a bad news, good news, bad news joke,” he said. “The first bad news is that it’s been out of control for years — which is why Moody’s downgraded the debt. The good news is the current budget is on track to stabilize the deficit and may even reduce it. But the second bad news is that stabilization isn’t enough — we actually need to shrink the deficit.”

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With geopolitical developments and fiscal instability in the spotlight, markets are likely to remain on edge. Investors will be closely watching both the progress of budget legislation and any signs of escalation in the Middle East, as these twin threats continue to shape the financial landscape.

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