While there are new sources of savings in the recently-passed House plan, these are insufficient to offset the tax and spending initiatives. The contours of the plan may change as the Senate seeks to put its imprint on the legislation, but the final package may not differ substantially in overall size from the House plan, which would add roughly $3 trillion to deficits over the next decade (see Figure 1).
The final cost of the package may turn out to be higher given that a future Congress may extend new tax breaks that would otherwise expire at the end of 2028. On the other hand, tariff revenue, which is not included in the legislation, will provide a partial offset to the deficit effects of the fiscal package. However, that revenue stream is uncertain given that it could decline if import volumes fall, if the Trump administration strikes bilateral trade deals, or if a future administration terminates tthe levies.
Figure 1: Deficit Impact of the House Reconciliation Package| $Bn
CBO’s score does not yet fully reflect interactions among different parts of the package and last-minute changes adopted prior to passage in the House on May 22. Estimates of these factors are based on preliminary CRFB analysis and total an additional $200 billion in reduced savings. These are included in the “All Other” category above. Note, overall scoring reflects the legislation as written, which includes the expiration at end-2028 of many new household tax breaks. If these are eventually extended over the full ten-year horizon, the total deficit impact, including interest expense, would approach $5 trillion.
Source: Congressional Budget Office, Committee for a Responsible Federal Budget.
Putting these details aside, the key point is that the fiscal position of the United States is set to deteriorate further. The debt to GDP ratio, which is currently around 100 percent, will rise to 120 to 130 percent of GDP over the next decade. Part of the issue is that, while certain aspects of the legislation would boost potential GDP growth, this boost will still leave nominal GDP growth below the nominal interest rate that Treasury will pay on the debt, judging by current forward rates (see Figure 2).
Figure 2: Government Funding Cost Proxy and Nominal GDP Growth
The 5-year Treasury yield is used as a proxy for the US government’s cost of funding given the current weighted average maturity of outstanding public debt. Nominal GDP estimate based on MacKay Shields’ 2025 estimate, and CBO estimates for 2026 – 2034 plus adjusted for the growth impact of the forthcoming fiscal package. We estimate that this package will boost the level of GDP growth by 25 basis points after five years and 40 basis points over a decade
Source: Bloomberg, Congressional Budget Office, MacKay Shields.
These developments have left an imprint on the Treasury market, with the 2s/30s curve steepening substantially since the beginning of April. But it is worth highlighting that some of this steepening reflects broad-based uncertainty following the April 2 announcement of “reciprocal” tariffs. And the curve has been gradually steepening since mid-2023, when market attention began to shift away from monetary tightening and towards eventual policy easing. The international context is important as well. Long-term yields have been rising globally, in part due to a changing global fiscal outlook (see chart below). Many countries are likely to respond to US tariffs with looser fiscal policy, leading to increased sovereign debt supply. In Europe, increased defense spending also impacts the global sovereign supply picture, especially in Germany, where new legislation not only exempts defense and security spending from strict debt rules, but also esablishes a sizable infrastructure fund. And finally, Japanese long-term yields have been rising especially sharply in recent months. There, policy makers have perhaps been too successful in breaking the deflationary mindset of recent decades, with higher inflation likley to compel tighter monetary policy even as growth weakens. In addition, the Bank of Japan’s QE tapering has also put upward pressure on yields. One risk that we are attuned to is that higher JGB yields could lead to increased repatriation flows by Japanese investors.
Figure 3: Thirty-Year Sovereign Bond Yields
Source: Bloomberg
All told, we expect ongoing volatility in US fixed income markets given our expectations for elevated, persistent policy volatility from the Trump administration. While we generally expect a steeper yield curve, this will prove to be driven as much by monetary as fiscal policy. Increased Treasury supply may at times pressure long-term yields higher. But weaker growth and eventual monetary easing will dampen this overall effect on the long end while also lowering 2- and 5-year yields as the year progress. Finally, Treasury Secretary Bessent is likely to take steps to cushion the supply impact of the fiscal package on the long end of the Treasury curve. He has already proved hesitant to increase auction sizes for longer-dated Treasury securities. In addition, he is seeking changes to the Supplementary Leverage Ratio to encourage banks to increase their Treasury holdings.
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