Washington: US stock markets and government bonds experienced significant declines on Wednesday. The primary driver was a combination of weak Treasury bond auctions and growing concerns surrounding the debt implications of former President Donald Trump's proposed tax cut plan. The S&P 500 index fell by 1.6%, while the yield on 30-year Treasury bonds surged to 5.096%—its highest level since late 2023.
Weak Treasury Auction Fuels Concerns
A $16 billion auction of 20-year Treasury bonds saw weak demand at a 5% coupon—the highest coupon rate for this bond since its relaunch in 2020. Primary dealers (who purchase unsold bonds) took 16.9% of the offering, indicating lingering hesitation in the broader market regarding government debt.
Trump's Tax Plan and Political Instability
Trump's proposed "Big, Beautiful Bill" aims to expand the 2017 tax cuts. Independent analysts suggest this bill could add at least $3 trillion to the US national debt over the next decade. While House Speaker Mike Johnson cited agreement within the GOP on state tax cuts, groups like the Freedom Caucus are pushing for greater spending reductions.
Credit Rating Downgrade and Investor Anxiety
Moody's downgrade of the US credit rating from AAA has already shaken investor confidence. The weak bond auction further underscores growing unease in the market regarding long-term government bonds. Pooja Kumra, rates strategist at TD Securities, noted, "There is no appetite in the market for long duration."
Stock Market Decline, Tech Stocks Suffer
Over 95% of S&P 500 companies closed in the red. The financial, healthcare, and real estate sectors were particularly hard hit. Technology stocks also declined, especially following OpenAI's $6.4 billion acquisition of Sir Jony Ive's hardware startup 'io'. Apple shares fell 2.3%, while Amazon, Nvidia, and Microsoft each experienced declines exceeding 1%.
Dollar Index Weakness
The rising debt levels and weak Treasury demand contributed to a 0.6% drop in the dollar index. Investors are now concerned about the potential impact of the US's fiscal situation on the dollar's global stability.
With Trump's tax bill approaching a vote and market focus remaining on bond demand, the coming weeks could prove decisive for the US economy. Investors are advised to closely monitor market direction and government policies.
