Treasury Secretary Scott Bessent's ongoing tax and spending negotiations with Republicans are pivotal for both bond and equity markets. The discussions aim to extend tax cuts from the first Trump administration, which are set to expire at the end of the year. Without a significant reduction in spending, this could lead to increased government debt issuance. The Congressional Budget Office projects a $1.9 trillion annual deficit on average through 2034, which could swell by an additional $3.3 trillion if the tax cuts are extended, alongside $467 billion in added interest expenses.
Despite a recent rally, Treasuries remain undervalued relative to fundamental drivers like rates and inflation expectations, partly due to uncertainty around future inflation. This uncertainty elevates the term premium investors demand for longer-dated bonds. Higher expected deficits tend to push real yields higher, which can depress bond prices as investors seek greater compensation for inflation risk. The potential for increased government borrowing could also impact equity markets by adjusting risk premiums related to fiscal sustainability concerns.
As of 16:24 on February 5, the 10-year Treasury yield (TNX) stands at 4.42%, down from its last close of 4.51%. The yield opened at 4.46%, reaching an intraday high of 4.47% and a low of 4.40%. The ongoing tax and spending talks are crucial in determining the future trajectory of yields and their broader market implications.