The $1.37 trillion budget agreement reached in Washington was met with a muted response from the bond market.
The 10-year Treasury yield ticked up to 2.05% on Tuesday, compared with 2.04% the day before. That remains near the lowest levels since President Donald Trump’s election in November 2016.
The budget agreement would raise limits on spending by $321 billion over two years, putting further upward pressure on the budget deficit. The deal could add roughly $1.7 trillion to projected debt levels over the next decade, according to the Committee for a Responsible Federal Budget.
The Congressional Budget Office had already been projecting that the federal deficit would climb to nearly $900 billion in 2019 and then top the $1 trillion mark in 2022.
Market analysts say the bond market doesn’t care much about the worsening outlook for the federal budget. Instead, rates are being driven in large part by subdued inflation and central bank policy.
The Federal Reserve, citing concerns about global growth and inflation, has signaled a rate cut is coming as soon as next week. Government debt in France, Germany and Japan are negative, pushed lower by the European Central Bank and Bank of Japan’s negative interest rate policy. That makes US debt look even more attractive by comparison, despite the enormous budget deficit.
Although investors don’t seem very worried about the US fiscal situation now, that could change eventually.
“We can’t know what the inflection point is,” said Guy LeBas, chief fixed income strategist at Janney Capital Management. He pointed to how investors suddenly became obsessed with Greece’s debt in 2009 – despite the fact that it had been rising for a decade.
“Markets don’t care -- until they suddenly do,” LeBas said.