US Treasury yields rose on Tuesday with the benchmark yield hitting a seven-week high as the biggest overhaul of the US tax code in more than 30 years appeared on track to become law by the end of the week. The US House of Representatives approved the debt-financed tax plan on Tuesday, sending the bill to the Senate, where lawmakers were due to take up the package later in the evening. President Donald Trump would then be expected to sign it shortly after.
Republicans, who control both lawmaking chambers, said their tax plan would boost consumer spending and business investments, while independent government estimates showed the proposed tax cuts would end up adding at least $1 trillion to the $20 trillion national debt in 10 years. "Obviously the tax bill is going to add to our already increasing deficits over the next year," said John Canavan, market strategist at Stone & McCarthy Research Associates in New York. "The impact is going to be combined with the Fed's unwinding of the balance sheet."
Prior to the House vote, traders were selling bonds in reaction to news that domestic home construction unexpectedly accelerated to a seasonally adjusted annual rate of 1.297 million units, a 13-month high, in November. This supported the view of a solid pace of economic expansion in the fourth quarter. Anticipation of bigger corporate profits from the tax changes propelled the three major Wall Street indexes to all-time highs on Monday and reduced the appeal of lower-yielding US government bonds, analysts and traders said.
US stock prices were marginally lower on Tuesday. The selloff in Treasuries also steepened the yield curve due to profit-taking, reversing some of the flattening for a second day.
"I think that what we're seeing here primarily is just position-squaring into year-end and taking some profits on the curve-flattening that we've seen," Canavan said. The gap between five-year and 30-year yields widened to 59.6 basis points from Monday's 57.2 basis points. It contracted to 51.9 basis points on Monday, the slimmest since October 2007, Reuters and Tradeweb data showed.
Benchmark 10-year Treasury yield was up 7 basis points to 2.459 percent after hitting its highest since late October. The two-year yield touched a nine-plus year peak of 1.861 percent, while five-year yield reached 2.230 percent, which was the highest since April 2011.