Stocks and bonds wobbled on Monday as investors grew nervous about the latest developments in the U.S. government’s budget negotiations. The S&P 500 index initially declined but recovered to end the day 0.1 percent higher. Bond prices also fell, with yields on 10-year Treasuries briefly rising before settling just under 4.5 percent.
The dollar weakened against other major currencies but regained some ground later in the day. Investors are concerned about a bill in Congress that would make President Trump’s 2017 tax cuts permanent, potentially adding trillions of dollars to the federal debt. Some lawmakers have expressed misgivings about the bill’s failure to significantly reduce the deficit.
However, markets calmed somewhat on Monday as early signs emerged of potential progress in negotiations to further control spending. Growing worries about government debt have threatened to disrupt the relative stability in financial markets.
Investors anxious about budget negotiations
The tax cut legislation, along with broader concerns about the fiscal deficit and increasing debt costs, has been cited as a contributing factor to the market jitters. The recent downgrade of America’s sovereign debt rating to Aa1 by Moody’s has also added to the unease. The rating agency pointed to the $36.2 trillion debt, rising net interest costs, impending tax cuts, and political gridlock as reasons for the downgrade.
This move follows similar downgrades by S&P Global, ending America’s triple-A status after more than a century. Ray Dalio, founder of Bridgewater Associates, has expressed concerns that the risk to U.S. Treasurys is even greater than suggested by the recent downgrade. Dalio argues that the assessment does not fully account for the potential risk of the federal government printing more money to pay off its debt, which would decrease the value of payments to bondholders.
“You should know that credit ratings understate credit risks because they only rate the risk of the government not paying its debt,” Dalio said in a post. “They don’t include the greater risk that the countries in debt will print money to pay their debts thus causing holders of the bonds to suffer losses from the decreased value of the money they’re getting,” he added.
