The Trump tax law temporarily avoids default but buries greater risks for future finances

Concerns over fiscal conditions trigger rise in U.S. Treasury yields

Tax bill expected to reduce tax revenue by $4.5 trillion over 10 years

The bill is expected to boost corporate profits and increase stock prices

Reuters New York, July 3 - U.S. President Trump's tax cuts and spending bill was passed by Congress on Thursday. The bill avoids the possibility of a short-term default by the U.S. government but exacerbates the long-term debt issues facing the country.

Republican lawmakers in the House approved the bill. The legislation extends Trump's 2017 tax cuts, authorizes increased spending on border security and military, significantly cuts Medicare and Medicaid, and adds trillions to the national debt. Trump is expected to sign the bill into law.

As part of the tax plan, lawmakers raised the U.S. government's borrowing limit of $36.1 trillion (which is expected to be reached later this summer) by $5 trillion, alleviating concerns about a potential default on U.S. debt.

Analysts had originally estimated that the so-called "X date" could occur in late August or early September. The "X date" refers to the date when the Treasury would be unable to meet all its debt obligations without raising or suspending the debt ceiling.

However, in the long run, the bill is largely viewed as detrimental to the U.S. bond market and the nation's fiscal health. According to nonpartisan analysts, the bill is expected to increase U.S. debt by $3.4 trillion over the next 10 years.

This will heighten concerns about additional bond supply and weakened demand for U.S. Treasuries, which have been major drivers in financial markets in recent months.

Mike Medeiros, a macro strategist at Wellington Management, said, "The bill exacerbates some structural concerns about Treasuries, primarily the ongoing fiscal deficit and elevated debt levels, as well as inflation."

BlackRock warned on Monday that foreign buyers have developed an aversion to U.S. debt. There is indeed a risk that demand for the $500 billion in bonds issued weekly by the U.S. may further decline, pushing up borrowing costs.

According to estimates from the Congressional Budget Office, the bill will reduce tax revenue by $4.5 trillion over 10 years, cut spending by $1.1 trillion, and cause 10.9 million people to lose federal health insurance.

The bill provides tax incentives for businesses to purchase equipment and R&D costs, as well as other tax breaks, thereby stimulating economic growth. However, some investors are concerned that excessive debt may undermine the economic stimulus measures in the bill.

Campe Goodman, a fixed income portfolio manager at Wellington Management Company, stated that he expects the bill to boost economic growth by 0.5% next year, but the market is overly complacent about the long-term risks of rising borrowing costs.

Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, said, "We believe that the big and beautiful bill will accelerate corporate profit growth, ultimately driving up stock values. However, this may lead to higher U.S. Treasury yields for a longer period, reducing the long-term appeal of many fixed income investments."The yield on the 10-year U.S. Treasury bond rose on Wednesday after several days of decline, partly due to investor concerns over fiscal issues.

Andrew Brenner, head of international fixed income at National Alliance Capital Markets, said the sharp drop in the bond market on Wednesday indicates that bond vigilantes are besieging the market. Bond vigilantes are investors who punish poor policies by driving up government borrowing costs.

"The bond vigilantes want to see more deficit reduction... they believe Trump and Congress have not done enough," he wrote in a report to clients on Wednesday.

By raising the U.S. federal borrowing limit, the bill eliminated the risk of a U.S. debt default. A U.S. debt default could have catastrophic consequences for global markets