UPDATE: Why the $1.7 trillion deficit-ballooning tax cut might not spark a bond sell-off
By Sunny Oh
The Congressional Budget Office estimates the tax plan will add $1.7 trillion to the budget deficit over the next 10 years
As the new tax bill makes strides, the prospect that a tidal wave of freshly issued government paper will slam bond prices has kept investors on edge.
That's why analysts say Treasurys have experienced bursts of selling as an overhaul of the U.S. tax code makes headway through the chambers of Congress. The widespread belief that tax cuts -- and, more important, their effect on budget deficits and public debt -- are bearish for government bonds helped the 10-year yield briefly break above the 2.40% key level in October (http://www.marketwatch.com/story/treasury-yields-stabilize-as-traders-await-third-quarter-gdp-data-2017-10-27), which had capped the benchmark yield since May. Yields and debt prices move in opposite directions.
"Higher deficits [and] higher debt loads is not great for bonds, all else being equal," said Mark Zandi, chief economist at Moody's Analytics. "As a bond investor, I wouldn't be all too excited about this."
See: Trump tax-cut plan may spark sell-off in bond market, Robert Rubin says (http://www.marketwatch.com/story/trump-tax-cut-plan-may-spark-sell-off-in-bond-market-robert-rubin-says-2017-10-12)
The logic goes that a fall in tax receipts would widen the federal deficit and push the government to issue more debt, weighing on the prices of Treasurys and driving up yields.
But higher borrowing costs have rarely materialized after past tax cuts, such as those delivered during the administrations of George W. Bush, Bill Clinton, and Ronald Reagan.