Wall Street watches nervously as Congress drags out budget talks

Wall Street is getting jumpy again, and this time, it’s not about tariffs. Traders are now locked onto Congress, where budget negotiations are stalling and blue state Republicans are throwing up roadblocks.

The House’s massive federal budget bill hit a hard pause Tuesday when several GOP lawmakers refused to support it without a bigger write-off for state and local taxes, known as SALT. That demand is now threatening to derail the entire timeline for passage.

Even with President Donald Trump getting directly involved in the talks, the standoff continues. The Republican leadership had initially aimed to pass the bill before Memorial Day weekend, but that goal is fading fast.

And even if lawmakers in both chambers somehow reach a deal, the final version is expected to add more government debt, piling onto America’s already eye-watering $36 trillion deficit.

SALT fight stalls Trump’s ‘beautiful bill’

The SALT issue has become a battle line. Republicans from states with high local taxes want the bill to allow a larger deduction, or they won’t vote for it. Their threat is serious enough that it’s delayed everything.

Trump has been actively pushing behind closed doors, but his efforts haven’t yet unlocked the gridlock. The delay is making investors nervous, and they’re watching every move from Washington like hawks.

The bigger concern is what comes after a deal… the consequences. If this bill goes through, analysts say it’s going to flood the bond market with more Treasury debt, which will likely drive interest rates up and hurt investor demand.

Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, said in a Tuesday note that Trump’s bill “is likely to see various amendments before it is passed in the two chambers of Congress and signed into law, but it nonetheless is expected to add trillions of dollars to the country’s [$36 trillion] deficit over the next decade.” She warned that this could push the supply of Treasury debt even higher, which means more strain on the bond market.

At the same time, Stephen Juneau, a US economist at Bank of America, warned of a possible “bond-buyer-strike.” In his note, also released Tuesday, Juneau wrote, “Adding more supply to the market at a time when demand is softening could result in a spike in borrowing rates, a decline in the dollar, and a drop in equities. This could overwhelm any growth effects from the bill itself.”

Wall Street slides as traders brace for budget chaos

And the markets are already reacting. On Tuesday night, the S&P 500 closed down, breaking a six-day winning streak. The Nasdaq dropped too, logging its first red day in three sessions. The Dow Jones Industrial Average lost more than 100 points, snapping a three-day climb.

By early Wednesday, futures tied to all three major indexes were also sliding. The S&P 500 and Nasdaq futures both dropped 0.3%, while the Dow gave up 120 points, or 0.28%.

Investors had been hopeful just a few weeks ago. After Trump unveiled steep import tariffs back on April 2, markets dipped briefly, then staged a fast rebound. That rally had lifted all three indexes above their April levels, with the S&P 500 clawing back into the green for the year.

The 30-year Treasury yield is now hovering just below 5%, a level not seen in years. Rising yields mean falling bond prices, and that spells trouble for a market already unsure about what comes next. Add the Moody’s credit downgrade from last week to the mix, and the pressure is stacking up fast.

Meanwhile, the budget bill, originally billed as Trump’s “one big, beautiful bill,” may still pass, but not without wrecking confidence along the way.

And until Congress figures out how to deal with SALT, debt, and the deficit without wrecking demand in the bond market, Wall Street has no choice but to sit and wait—with one eye on the headlines and the other on portfolios.

There’s no major economic data scheduled for Wednesday, so for now, all eyes stay glued to Congress and the growing federal deficit.

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