Republicans knew they’d have to overcome fierce internal divisions, thorny policy trade-offs and rock-solid Democratic resistance to pass their massive domestic policy bill.
They didn’t count on a Wall Street backlash, too.
A softening Treasury bond market and surprise downgrade Friday of U.S. creditworthiness are the latest forces weighing on the GOP megabill — an unmistakable nudge to lawmakers that investors are growing increasingly concerned about legislation that could pile trillions of dollars more onto an already staggering national debt.
That message is being seen as vindication by some Republicans who have long warned about the nation’s unsustainable fiscal trajectory and who have vowed to seek massive spending cuts as part of the pending legislation.
“If we don’t have a wake-up call now — all of us, Democrat, Republicans — I don’t know what it’s going to take,” said Rep. Ralph Norman (R-S.C.), one of a handful of conservative hard-liners who delayed a key House Budget Committee vote this weekend over spending concerns.
But many other Republicans appear fully prepared to brush off the warnings — including the downgrade of U.S. debt from Moody’s Ratings, which directly referenced the pending legislation: “We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration.”
Trump’s National Economic Council director, Kevin Hassett, said in a Fox Business appearance Monday that the downgrade reflected former President Joe Biden’s fiscal policies and argued that the tax cuts in the megabill would position the U.S. for further growth. He also cited increasing tariff revenue that “should affect the credit rating in the end if you’ve got all this extra tax revenue coming in.”
Later Monday, Sen. Markwayne Mullin (R-Okla.) told reporters that the ratings agency “has done this every time we run up against a debt limit or we run up against a spending bill” and would “bounce it right back as soon as we pass a bill.”
In fact, this is Moody’s first-ever downgrade of U.S. sovereign debt; two other ratings agencies, S&P and Fitch, previously downgraded Treasury offerings citing similar concerns about out-of-control borrowing costs and have not restored the tip-top ratings they previously enjoyed.
But market watchers say it’s the pricing of Treasury debt that lawmakers should be paying close attention to as they put together President Donald Trump’s “big, beautiful bill” that is set to extend 2017 tax cuts and pile on more goodies for individuals and corporations without fully offsetting their cost.
“I hope the Republican majority in Congress realize that the bond market is watching,” said economist Ed Yardeni, who coined the term “bond vigilantes” in the 1980s to describe how investors can exert fierce pressure on economic policymakers.
For now, bond investors haven’t really revolted over the latest credit downgrade or the budget bill, Yardeni said, but if Republicans deliver “excessive” fiscal policy, they “could react adversely and try to force the Republicans to come up with a better program.”
The Moody’s downgrade sent a shiver across Wall Street on Monday morning. Yields on longer-dated Treasury securities climbed, with the 30-year Treasury briefly jumping above 5 percent, while rates on 10-year notes — which are used to price everything from home mortgages to credit card loans — at one point rose above 4.5 percent, up about a half point on the month.
While Treasury securities pared back some of those losses over the course of Monday’s trading session, Wall Street economists and market analysts said that the abrupt spike reflected a renewed focus on the U.S.’ gloomy fiscal outlook — and raised fears of a spiral of rising borrowing costs fueling more debt.
Prominent business leaders with close ties to Republicans, like Citadel’s Ken Griffin and Ray Dalio of Bridgewater Associates, have dialed up warnings of the deep risks posed by excessive deficit spending. This echoes the longstanding concerns of traditional conservatives who have long called for significantly lower levels of government spending.
“If we get to the point where people are no longer willing to buy Treasuries, then we’re in real trouble with a sovereign debt crisis,” said Rep. Lloyd Smucker (R-Pa.), who voted to advance the bill Sunday in the Budget Committee.
But Trump’s agenda has not prioritized fiscal rectitude, and the president’s appetite for deep tax cuts combined with thin congressional majorities that are reluctant to cut too deeply into the American social safety net are adding up to another deficit-busting bill.
The GOP megabill hasn’t been fully scored by the Congressional Budget Office, but preliminary estimates produced by the Yale Budget Lab and the Penn Wharton Budget Model project that it would add $3.4 trillion to federal deficits over the next decade. Republicans who say the bill won’t add to the national debt are including economic growth projections that most economists consider to be unrealistic.
“Nothing that the administration is doing presently is in the direction of trying to right the fiscal house,” said Yale Budget Lab President Natasha Sarin, a former top adviser to Treasury Secretary Janet Yellen.
Meanwhile, the cadre of congressional fiscal hawks who have insisted on deep spending cuts appear to be in retreat. When the Moody’s downgrade hit Friday, House GOP hard-liners felt they had maximum pressure to force major changes in the bill — including dramatically restructuring the design of the spending cuts, which are backloaded toward the end of the bill’s 10-year lifespan.
But all signs are that the Republican Party’s Trump-centric politics are set to outweigh any push for fiscal purity. The president and White House officials were enraged after the handful of Budget Committee holdouts tanked the key vote Friday, and as a weekend of tense talks wore on, it became increasingly clear that the Moody’s downgrade actually ramped up pressure for the budget hawks to fall in line, according to three Republicans granted anonymity to describe the talks.
Amid rising Treasury rates, a weakening dollar, and ongoing fallout from Trump’s global tariff regime — including an announcement last week from Walmart that it would need to raise prices — the downgrade added another concern for the health of the U.S. economy. The White House circulated a report over the weekend underscoring the need to pass the bill in order to keep businesses and households from being swamped by tax hikes.
Four key hard-liners, including Norman, voted “present” in a Budget Committee revote Sunday night, allowing the bill to advance. They are now pushing for changes to Medicaid provisions and clean-energy tax credits that could reap significant savings, though at least some of that could be used to offset additional tax cuts, leaving the bill’s overall fiscal footprint largely unchanged.
One hard-right proposal that is likely to be incorporated is to implement work requirements for Medicaid as soon as 2027 — two years sooner than in the initial draft of the House bill.
Paul Winfree, a veteran conservative policy analyst, said the hard-liners were smart to push for the cuts to bite sooner. The markets, he said, “may be sending a signal that they’re skeptical that the savings in the future will materialize. That’s why it’s so important to make sure that the spending reductions start much sooner than 2028 or 2029.”
Jordain Carney contributed to this report.
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