US borrowing costs spike as Trump tax bill and Moody’s downgrade spark debt fears

Long-term US borrowing costs surged to their highest level since late 2023 on Monday, as a fresh downgrade of the country’s credit rating and new fiscal legislation pushed bond markets into retreat and revived investor concerns over the sustainability of American debt, the Financial Times reported.

Yields on 30-year US Treasuries briefly climbed to 5.04%, exceeding last month’s tariff-induced highs, before settling at 4.91% by the end of the day. The spike came just days after Moody’s downgraded the US sovereign credit rating, citing rising debt levels and widening deficits. The move follows President Donald Trump’s renewed push for a sweeping tax and budget package that has alarmed bondholders and fiscal watchdogs.

Trump tax plan reignites deficit concerns

The tax bill, narrowly approved by a congressional budget committee on Sunday night, includes hundreds of billions of dollars in new tax cuts without corresponding spending reductions. Despite some intra-party resistance, Trump has pressed Republicans to push it through, declaring on social media: “Republicans MUST UNITE behind, ‘THE ONE, BIG BEAUTIFUL BILL!’”

Analysts warn that the legislation, if enacted, could add as much as $5.2 trillion to the national debt over the next decade, further pressuring US borrowing costs. The federal deficit already stands at 6.4% of GDP for 2024 — a level economists view as unsustainable.

“A bigger deficit means more Treasury issuance,” said Subadra Rajappa, head of US rates strategy at Société Générale. “Some investors are selling in anticipation of extra supply and inflation risk.”

Credit downgrade spooks bond market

Moody’s downgrade late Friday evening removed the US from the elite group of triple-A sovereign borrowers, calling into question the country’s ability to manage its long-term fiscal obligations. The credit agency also downgraded counterparty risk ratings for major financial institutions including JPMorgan Chase, Bank of America, State Street, and Wells Fargo.

“The downgrade is a stark reminder that the US should not take for granted its ‘exorbitant privilege’ of borrowing cheaply despite large deficits,” said Nicolas Trindade of Axa Investment Managers.

Despite the downgrade, analysts do not expect a major selloff of Treasuries by institutional investors or central banks. Global financial rules do not require bondholders to offload US debt in response to such downgrades, and the US Treasury market remains the world’s largest and most liquid.

Still, the downgrade sends a symbolic signal that US fiscal policy is straining its status as the world’s safest asset haven. “It’s another warning for a US administration already on bond vigilante alert,” said Pooja Kumra at TD Securities.

Investors weigh inflation, tariffs, and uncertainty

The Moody’s decision and the Trump tax bill are only part of the story. Markets are also reacting to lingering uncertainty over inflation and Trump’s tariff agenda, which continues to cast a shadow over economic forecasts.

“The direct driver is the Moody’s downgrade,” said Wei Li, head of multi-asset investments for China at BNP Paribas. “But there are more fundamental reasons for rising yields — there’s still a lot of uncertainty around tariffs, inflation, and fiscal direction.”

Monday’s bond market turmoil left broader markets relatively unmoved. US stocks ended flat after early declines, and the dollar fell 0.7% against a basket of major currencies, including the euro and pound.

As the Trump administration presses ahead with its tax plan and global investors reassess the safety of US assets, the coming weeks could test market confidence in Washington’s ability — and willingness — to contain its mounting debt.