The Republican-backed budget reconciliation bill could lead to higher U.S. yields by increasing federal deficits and accelerating the growth of government debt, but it is unlikely to undermine investor confidence in the short to medium term. On May 22, the U.S. House of Representatives approved major changes to government spending and revenue in the form of a reconciliation bill. The bill initially made only slow progress due to the Republicans' narrow House majority and intra-party disagreement. More conservative Republicans demanded greater spending cuts to reduce the deficit, but they faced pushback from centrist Republicans from "purple" districts, who instead favored increased tax expenditure in the form of higher state and local government deductions. The House leadership, meanwhile, was keen to implement President Donald Trump's costly tax-cutting-focused priorities. The consequence of the political compromise was a costly reconciliation that will lead to larger U.S. fiscal deficits. The bill passed by one vote, 215 for versus 214 against. The Senate may yet make some changes to the legislation, meaning the final details will not be known for a few more weeks. But the broad contours of the bill will not change.

• Republicans have only narrow majorities in both houses. They control 53 out of the Senate's 100 seats and 220 seats of the House's 425 seats. 
• The budget reconciliation process allows Congress to pass tax and expenditure legislation by circumventing the 60-vote requirement in the Senate (filibuster). 

The budget reconciliation bill would help avoid a sharp increase in taxation at the end of 2025 when the 2017 Tax Cuts and Jobs Act (TCJA) tax cuts expire, thus avoiding a significant shock to domestic demand and economic growth. The provisions of the 2017 bill are to expire at the end of 2025 and would translate into a sudden increase in taxes (a so-called fiscal cliff). If approved by the Senate, the new budget reconciliation bill would extend the 2017 tax cuts worth $4 trillion or so (relative to the current law baseline), including the increased standard deduction and childcare tax credit; it would also cut taxes on tips and overtime pay. Additionally, the House-approved bill foresees around $800 billion in Medicaid-related cuts, on top of other expenditure reductions related to the phasing out of Biden-era green tech fiscal incentives. It would also boost military and border security spending for a total of $370 billion, in addition to higher tax expenditure related to an increase in state and local government deductions. Moreover, the bill would raise the U.S. debt ceiling by $4 trillion. All other things equal, avoiding the additional tax cuts would support short- and medium-term economic growth, provided U.S. bond yields do not spike and markets do not react too negatively. 

• The Byrd Rule, a provision of the U.S. Congressional Budget Act, sets a budget window of ten years to limit the increase in government debt that can be enacted through budget reconciliation. The rule does not allow for extraneous provisions to be included in legislation. Legislation is considered extraneous if it does not have a budgetary effect, if its budgetary effect is merely incidental, if the effect is outside the jurisdiction of the committee recommending it, if the effect is not what the original provision calls for, if the measures affect social security spending and, importantly, if it increases the deficit beyond ten years. This matters because if the Republicans want to make the 2017 tax cuts permanent, they will need to offset the costs by implementing other cost-saving measures.
• The baseline budget deficit projection is based on federal spending and revenues under current budgetary practices and policies. The current policy scenario assumes that all policies are extended, even if certain provisions are set to expire, such as many TCJA cuts. The costs of the budget reconciliation bill are calculated based on current law policies. According to the Congressional Budget Office, extending the TCJA provisions, compared with current law, is projected to reduce federal revenues by $4 trillion from 2025 to 3025. That current-law baseline counts the extension of the TCJA provision as a cost that, due to the Byrd Rule, would need to be offset with an equivalent amount of cuts to remain deficit-neutral during the ten-year budget window.

If passed roughly in its current form, the bill will also accelerate the accumulation of federal government debt, which will likely put upward pressure on bond yields and medium-term government borrowing costs. The White House and Republicans in Congress argue that the tax cuts, combined with economic deregulation and revenue related to higher tariffs on U.S. imports, will pay for themselves. But this has not proven the case with previous U.S. tax cuts, including those imposed under the TCJA in 2017. The continued and accelerated increase in government debt will likely raise concerns among investors about the United States' long-term fiscal trajectory and may lead to higher U.S. bond yields, but it is unlikely to pose any significant or immediate financing challenges for the U.S. Treasury. The U.S. federal government has significant financing flexibility due to the breadth and depth of the U.S. Treasury market, the international role of the dollar, and Washington's long track record of repaying government debt. But a significant sudden spike in yields could still force the U.S. government to shift toward a more fiscally disciplined stance, at least following the approval of the budget reconciliation bill. This would still be unlikely to alter the debt trajectory much, given that the annual appropriations process only accounts for one-fourth of total spending, including defense. Nevertheless, it would signal to financial markets that Congress is willing to address debt sustainability challenges, if necessary, thus reassuring investors (somewhat).

• U.S. federal government debt held by the public amounted to 98% of GDP last year, compared to just 73% of GDP a decade ago, according to the Congressional Budget Office. Under current policy (not accounting for the budget reconciliation bill), debt would reach 156% of GDP by 2055, meaning debt is already on an unsustainable long-term trajectory.
• The non-partisan Committee for a Responsible Federal Budget estimates the budget reconciliation legislation in its current form would add $3.3 trillion to U.S. federal debt (or roughly 10% of 2024 GDP) over the next decade, with the debt ratio reaching 125% of GDP by 2035, instead of 117% of GDP.
• On May 16, Moody's Ratings was the last international credit rating agency to strip the United States of its AAA sovereign credit rating out of concern about large fiscal deficits and increasing debt levels. Standard & Poor's had done so in 2011 and Fitch Ratings in 2013. Moody's Ratings also forecast that the U.S. federal deficit would increase from 6.4% of GDP today to almost 9% of GDP in 2035. The International Monetary Fund has called on the United States to reduce its deficits. 

However, as long as U.S. policymakers do not pursue other destabilizing policies, the short- to medium-term implications will be manageable because investors are unlikely to dump dollars and government debt on a large scale. The U.S. Treasury market is the largest, most liquid and most developed financial market in the world. This makes both domestic and foreign investors less sensitive to increased credit risk in the United States, as there are simply no good alternatives to the U.S. Treasury market in terms of safe assets and size. If the Senate approves the budget reconciliation bill in its current form, the worsening budget outlook may lead investors to diversify further, as the deteriorating fiscal dynamics will slowly and steadily increase in U.S. government debt. But while they may require higher yields, investors will not massively sell down their holdings as long as they remain confident that Congress will eventually take corrective action (whether under the current administration or future ones). Meanwhile, countries like China will continue to diversify their assets, including through gold purchases and by moving into non-U.S. Treasury assets. But the degree to which investors and countries can divest from U.S. treasuries is somewhat limited. Alternative markets for safe assets are either very small (Australia, Canada), too fragmented (eurozone), or fraught with more political and economic risk, in addition to being harder to access (China). China, for its part, also remains unlikely to aggressively diversify away from the U.S. dollar, as this would jeopardize ongoing U.S.-China trade negotiations and risk inviting severe economic and political retaliation from Washington. Moreover, such diversification could lead to financial losses for Beijing by potentially causing serious market dislocation (particularly in the case of long-dated bonds), as well as a stronger Chinese currency (unwelcome in the face of current trade tensions and restricted market access). This means that once the Senate approves the budget reconciliation bill in the coming weeks, significant volatility — at least nothing worse than what the U.S. Treasury market witnessed in 2019, 2020 and 2025 — is improbable. Instead, the most likely scenario is one of higher or high-ish yields on long-dated U.S. treasuries and possibly a weaker dollar, as both domestic and foreign investors shorten the average maturity of their holdings and perhaps at the margin move into non-dollar currency. 

• According to the International Monetary Fund, 59% of global foreign-exchange reserves are held in U.S. dollars and only 20% are held in euros, while Chinese yuan holdings amount to only 2%.
• In its April World Economic Outlook, the International Monetary Fund lowered its 2025 forecast for real U.S. GDP growth by nearly a full percentage point to 1.8% amid heightened uncertainty about U.S. trade policy. On April 11, the Trump administration announced a 90-day pause to its sweeping reciprocal tariffs after the levies severely rattled the U.S. Treasury market and spurred an unusual sell-off of the dollar. 
• The U.S. Treasury market experienced significant volatility in 2019, 2020 and most recently in 2025. But in all cases, the fundamental drivers were market technicals rather than concern about U.S. government creditworthiness.