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Bond yields lower, dollar slips as markets skeptical about tax bill

  • Bond yields fell and the dollar weakened as markets treated the release of the House tax package with skepticism.
  • Strategists said the ambitious cuts in tax rates for companies and individuals were positive but how they are going to get paid for is unclear, since some proposals are already clearly contentious.
  • A proposed cut in the mortgage deduction to $500,000 is one area that could be a battleground, and home building stocks were trading sharply lower.
Speaker of the House Paul Ryan (R-WI) talks to reporters following the weekly House Republican Conference meeting at the U.S. Capitol October 24, 2017 in Washington, DC.
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Speaker of the House Paul Ryan (R-WI) talks to reporters following the weekly House Republican Conference meeting at the U.S. Capitol October 24, 2017 in Washington, DC.

Bond yields fell and the dollar weakened as markets greeted the House tax bill with skepticism and concern about how hefty corporate and individual tax cuts will ultimately get paid for without ballooning the federal deficit.

Details of the House plan trickled out with traders watching headline by headline. The plan cuts the corporate tax rate to 20 percent permanently, compresses individual tax brackets and would repeal estate taxes in 2024.

But some of the contentious elements of the plan, like a limit on mortgage deductions to $500,000 and a new $10,000 limit on the deduction of state and local taxes, are expected to put heat on lawmakers as they attempt to create a final bill.

"It's pretty ambitious, and now the real fighting is going to begin. Now you see who is going to pay the price as opposed to what people get," said Michael Schumacher, director, rate strategy at Wells Fargo.

Yields fell across the Treasury curve, but less at the short end. The dollar also slid with the dollar index down 0.2 percent at 94.65. Stocks were mixed but homebuilding stocks were under pressure and the XHB, SPDR S&P Homebuilders ETF, was down 2.5 percent, its worst day since October 2016.

The S&P 500 was off slightly, while the Dow was higher. The Russell 2000 was also up slightly. The small caps in the Russell would benefit disproportionately compared with larger companies, which pay a lower average tax rate.

"It did seem like there was a little bit of buy the rumor, sell the fact. Treasury yields fell, and that weighed on the dollar," said Win Thin, senior currency strategist at Brown Brothers Harriman.
"We know this is the first stab. I think the mortgage deduction is a bit of a nonstarter. There's going to be pushback. I'm not sure why you would trade on this. There's nothing built in stone."

Aaron Kohli, BMO director, fixed income strategy, said there was skepticism that revenue streams in the plan would be able to win approval from Congress.

"The math doesn't add up," he said. "The market is skeptical of how the warring factions within the GOP and between the GOP and Democrats will really come together enough on this to get the necessary votes."

Schumacher said the Treasury curve was continuing a flattening move Thursday, meaning the yields at the long end, or on the 10-year note, are getting closer to those at the short end, the 2-year note. He said if the bill was expected to pass as is, there would be a steepening with long end rates rising, in anticipation of more government bonds to pay for the tax package.

The yield curve has also been flattening on Treasury announcements on refunding which suggest there will be more issuance at the short end, impacting bills and the 2-year.

Schumacher said the move in the 2-year reflected that as well as the tax package. The 2-year yield was 1.61 percent, off slightly from Wednesday, while the 10-year slid to 2.34 percent from 2.38 percent Wednesday.