Stocks edge higher on tax deal

Associated Press

NEW YORK

The compromise backed by President Barack Obama and Republican leaders on extending tax cuts crushed bonds Wednesday as traders expected the plan to lead to higher budget deficits and a pickup in economic growth. Stocks posted modest gains.

Congressional Democrats still could scuttle the tax agreement, but bond traders are acting like it’s a done deal. Treasury prices dropped sharply, sending their yields higher for a second day. The yield on the 10-year Treasury note rose to 3.24 percent, the highest level since June 21 and a huge jump from the 2.93 percent it was trading at Monday before the tax deal was announced.

Part of the reason bonds are selling off is that investors now expect the tax package, which also includes an extension of unemployment benefits, to lead to better growth in the U.S. economy. That means less incentive to keep money parked in ultra-safe investments such as Treasurys and also a greater likelihood of inflation, which would erode the value of the fixed payments from bonds.

Economists already are raising their estimates for economic growth as a result of the tax-cut package. Goldman Sachs economists released a rough estimate Wednesday saying that the tax relief could wind up adding between 0.5 and 1 percentage point to economic growth next year.