President Donald Trump’s massive tax and spending plan has a little-known clause that might lead to the next round of an intensifying global trade war and could unsettle the already shaky market for US Treasurys, which are vital to the world economy.
Section 899 of the One Big Beautiful Bill Act, which was approved by the House of Representatives in May, would allow the White House to apply what some analysts are referring to as a “revenge tax” on foreign owners of Treasury bonds and other U.S. assets.
“The House bill raises questions about whether it would impose its so-called’revenge’ or’retaliatory’ tax on certain foreign holdings of U.S. Treasurys,” said Chye-Ching Huang, executive director of the Tax Policy Center at New York University School of Law. “This tax might even apply to foreign government holdings of U.S. Treasury bonds.”
At a time when courts are already arguing over the legitimacy of the vast tariffs the White House has imposed in an effort to restructure the world trade system, the law would grant the Trump administration extensive new powers to impose levies on foreigners.
Participants in the financial markets are already becoming more fearful as a result of the uncertainty. Analysts caution that at a time when the government is borrowing at historic levels and interest rates are stubbornly high, demand for U.S. debt may be stifled if foreign central banks or sovereign wealth funds think their Treasury holdings may be taxed.
Michael Zezas, a credit strategist at Morgan Stanley, wrote in a note to clients on Monday that “even the perception that the tax might apply to U.S. government debt could result in a shift in demand” away from Treasurys to other assets.
In addition to decreasing interest rates to assist people facing rising living expenses, the White House has had difficulty keeping the U.S. budget deficit under control.
The yield on the 10-year U.S. Treasury bond BX:TMUBMUSD10Y has actually increased since the Federal Reserve started lowering short-term interest rates in September of last year, rising from roughly 3.7% to 4.5% today.
Increased yields on these bonds raise borrowing costs for a variety of financial instruments, which has an impact on the entire economy. In particular, mortgage rates frequently follow the 10-year yield. Rising yields may result in higher monthly payments for potential homebuyers, driving some out of the market and reducing demand.
As a result, household budgets may be squeezed by increases in credit card, auto, and student loan rates.
Bond yields have increased as a result of investor fears about ongoing inflation, growing federal deficits that the Republican bill would make worse, and a decline in demand for American assets overseas.
Former New York Fed President Bill Dudley wrote in a Bloomberg opinion post on Friday that “America is becoming less attractive to global investors at a time when its government needs them more than ever.”
He attributed weak demand and rising interest rates on the “U.S. government’s dire and deteriorating fiscal position” and the uncertainties surrounding Trump’s trade war.
Federal Financial Analytics managing partner Karen Petrou cautions that Section 899 might portend something much more significant than a targeted trade reaction. She sees it as part of a larger trend toward economic nationalism under Trump that has the potential to drastically change how the United States interacts with international financial flows.
She referenced recent remarks by former Trump Fed board nominee Judy Shelton, who has attacked the Fed’s payouts to foreign banks on the reserves they have deposited at the U.S. central bank, in a letter to clients on Monday.
Despite being a vital component of the global currency system, Petrou said the Trump administration may soon portray these payments as gifts to outsiders, guaranteeing “dollar-clearing stability in a crisis.”
Petrou noted that further actions of this like should be anticipated in the future, since the White House has demonstrated a willingness to take the chance of upsetting aspects of the worldwide economy.
“An Administration determined to kick foreign students out of the United States will not hesitate to bar [interest payments on reserves] to foreign banks and maybe even central banks if the issue arises to its notice,” she stated.
The measure’s proponents contend that it is an essential weapon against governments that aim to impose taxes on American businesses through measures such as digital-service levies. Additionally, they contend that the law would be utilized to tax foreign corporate earnings made in the United States and remitted overseas rather than allowing taxes on U.S. Treasury bonds.
Although there will be a strong push to change the wording in the Senate to make this clear before sending the bill to the president’s desk, Zezas of Morgan Stanley wrote, “The intent of this tax law is that it will never be applied.” Zezas also pointed out that “conventional wisdom” holds that it won’t permit taxes on Treasury bonds.
Analysts at Beacon Policy Advisors wrote in a note on Monday that “outside pressure is also increasing on senators to modify… the Section 899 proposal.” They noted that although the proposal might “be modified in the Senate,” it’s important to keep in mind that the measure “is widely supported by GOP senators, suggesting that the effort to strip [it] from the bill will be an uphill battle.”
