Market Commentary 6/02/25

President Trump’s “One Big, Beautiful Bill” is an extensive legislative package funding and enacting much of his second-term agenda. It bundles together a continuing resolution to keep the government funded through the end of fiscal 2025, along with major tax and spending provisions.

Key components of this legislation include:

• Extended Tax Cuts: Permanent extension of the 2017 Tax Cuts and Jobs Act (TCJA) provisions, preventing individual and corporate tax rates from rising in 2026. This covers income tax cuts and business incentives that were set to expire, resulting in no significant tax increases next year. The bill also modifies some tax rules, such as enhancing the deduction for pass-through business income and other credits and raising the state and local tax (SALT) deduction cap from $10,000 to $40,000.
• Border Wall & Immigration Funding: Financing for border wall construction and enforcement on illegal immigration. The bill funds tens of thousands of new Border Patrol agents and increases deportation capacity, aiming to remove up to 1 million people annually
• Defense Spending: A substantial increase in defense expenditures, highlighted by funding for a “Golden Dome” missile defense system. This expensive initiative, along with higher overall military outlays, reflects Trump’s focus on bolstering U.S. defense capabilities. These defense increases are expenditures without immediate offsets, contributing to some of the deficit concerns we will address later in this commentary.
• Entitlement & Spending Reforms: The package introduces cost-saving measures to entitlement programs. It tightens eligibility for social safety net programs like Medicaid, SNAP, and Affordable Care Act subsidies. In effect, certain benefits would be curtailed or have stricter work requirements. These cuts were intended to partially offset the tax cuts, but even lawmakers note the reductions “don’t come close” to paying for the bill’s expensive provisions. Despite some spending reductions and additional savings like repealing unused COVID funds, the net result is expected to be larger fiscal deficits.
• Continuing Resolution to Prevent a Shutdown: Procedurally, the bill leverages a continuing resolution to fund government operations through September 30, 2025. By combining appropriations into this legislation, Congress avoids a near-term government shutdown. Essentially, this year’s federal funding is locked in. This maneuver ensures the government stays open, but it also sidesteps the normal budget process, a sign of how urgent and sweeping the legislation is.

Taken together, the bill is an omnibus blend of tax cuts, spending increases, and policy initiatives. The market was quick to realize that the plan has the potential to significantly expand the fiscal deficit in the coming years since the tax extensions and new outlays lack offsets. The Congressional Budget Office and others estimate the tax provisions alone could reduce federal revenues by roughly $4 trillion over the next decade.

In return, proponents argue the bill would prevent a broad tax increase on approximately 62% of U.S. taxpayers that would occur if TCJA expired as scheduled. Additionally, proponents argue the new legislation will spur investment growth, leading to additional revenue. Below, we discuss how markets have reacted.

One of the most contentious debates around the bill, and a source of market jitters, was over the SALT deduction cap. The initial draft sought to make the $10,000 SALT cap permanent. Eventually, the cap was extended to $40,000, with new income phaseouts for high-income earners. For markets, the SALT drama had two implications.

First, it increased volatility as traders handicapped the bill’s odds. Each update in the SALT negotiations, from rumors of a deal to reports of an impasse, prompted volatility in the bond and currency markets as the bill’s fate and the fiscal trajectory of the U.S. hung in the balance.

Second, the resolution of the SALT negotiations, by sweetening the tax cut further, worsened the deficit outlook. Analysts noted that raising the cap to $40,000 would cost significantly more in lost revenue than a $30,000 initially proposed cap. This outcome led to investor concerns about the deficit, leading to bond market nervousness and a spike in rates.

This uncertainty has been widening trading ranges for Treasurys and has led to short-term volatility in both yields and the dollar.