Why Aren’t Treasury Investors Sounding The Alarm About The Tax Cut Extension?

Congress has released draft legislative text for extending the 2017 tax cuts. The Joint Committee on Taxation has estimated the proposed legislation would add $5.6 trillion to the deficit over the next decade, to be offset by $1.9 trillion in spending reductions, for a net cost of $3.7 trillion. (Source: https://thehill.com/business/budget/5297588-republicans-tax-bill-jct/amp/ )

This is on top of a national debt figure that's already projected to rise above $50 trillion by the end of this decade without new fiscally expansionary legislation being passed.

Some Republicans representing battleground states have criticized the proposed spending reductions (mainly to lower-income social welfare programs & clean energy incentives) as being politically unpalatable. Historically, when this happens, congressional leadership tends to trim down some of the cuts & throw the cost onto the deficit, because these battleground legislators are on the front lines of deciding which party wins the majority.

Even the draft $3.7T cost would be by far the most expensive legislation ever passed, exceeding the 2020 CARES Act, the 2021 Rescue Plan, and the 2022 Inflation Reduction (EV incentives) Act. And it’s unlikely to be a large stimulus to economic growth, considering that most of the bill simply extends the 2017 tax reform (although there are some targeted new provisions like no tax on tips etc.)

Three years ago, when Liz Truss proposed big (and largely-unfunded) tax cuts in the UK, bond investors sent Gilt yields soaring from 3.5% to 5%, requiring the Bank of England to intervene. Truss resigned as Prime Minister after only 45 days, and she lost her Parliament seat in the next election.

Meanwhile, Treasury investors have remained calm. 10-year yields have settled around 4.5% in the last few days, and in fact are slightly lower today. They don’t seem to be alarmed by the exponential growth in deficits & the national debt. What explains this?

This topic isn't a political debate about the pros & cons of tax cuts & spending cuts. It's about the economic implications and impact on asset prices.