(Bloomberg) -- The ballooning federal budget deficit underPresident Donald Trump will force the U.S. to borrow more than $1trillion this year and risks worsening the frenzy behind the globalsell-off in stock markets.

The budget deal Senate leaders reached late Wednesday would addnearly $300 billion in government spending over two years and pushthe deficit higher.

Even beforehand, Bank of America Corp. senior U.S. economistJoseph Song warned in a report that the federal deficit was ontrack to exceed 5 percent of gross domestic product by 2019, by farthe largest for the economy while at full employment since WorldWar II.

That is “exactly the opposite of what the economictextbooks say lawmakers should be doing,” said Mark Zandi, chiefeconomist of Moody’s Analytics Inc. said in an email. “Deficitfinanced tax cuts and spending increases in a full-employmenteconomy will result in more Fed tightening and higher interestrates.”

Investors remained on edge Thursday as the resurgent threat ofinflation and higher bond yields renewed concerns that risinginterest rates will drag on the economy.

U.S. stocks dropped for the fourth time in fivedays, with the benchmark S&P 500 down about 1.62 percent at1:25 p.m. New York time.

“An increase in debt instruments, people dumping bonds andconcerns about higher inflation -- that is a toxic combination,”said Alexis Crow, head of PricewaterhouseCoopers LLP’sgeopolitical investing group in New York. “Since the crisis, debthas not disappeared. It’s an unsustainable situation.”

In the short term, the combination of tax cuts and moregovernment spending will throw fuel onto the economy, boostinggrowth, employment and probably wages.

Zandi estimates the spending deal alone, if passed by Congressand signed by Trump, could add as much as 0.4 percent to economicgrowth this year and 0.2 percent next year, raising his growthforecast to 3.1 percent in 2018 and 2.3 percent in 2019.

But investors in Treasuries, which pay fixed payments over thelife of the security, are wary of inflation, which erodes the valueof their income.

The 10-year Treasury yield, the key benchmark for global ratesincluding many U.S. mortgages, reached 2.88 percent this week - itshighest since January 2014 and up from 2.41 percent at the end oflast year. The 30-year bond yield is now above 3 percent.

The tax cuts and spending increases are kicking in as thedeficit already was rising as the retirement of Baby Boomers addsto Social Security and Medicare costs and the Federal Reserve’srate increases raise the cost of interest payments on the U.S.debt.

What our economists say

I would not expect much of a boostfrom this at all, as the infrastructure portion of it seemsminuscule. My best estimate would be 0.1 pp from increased militaryspending (through the government component of GDP).BloombergEconomics’ forecast for GDP growth this year is 2.6 percent.--Yelena Shulyatyeva, Bloomberg Economics

Treasury Secretary Steven Mnuchin last week announced that theU.S. this year will boost note and bond sales for the first timesince the global financial crisis as he seeks to finance risingbudget deficits, fueled in part by the tax overhaul that Trumpsigned into law at the end of last year.

The Fed is also rolling off its Treasury holdings.

While there is nothing Mnuchin can really do to calm the stockmarket, his increase in debt sales in part to finance fiscalinitiatives is part of the problem, said Edward Yardeni, presidentof Yardeni Research Inc. in New York, who coined the term “bondvigilantes” in the 1980s to describe investors who sell bonds toprotest monetary or fiscal policies they consider inflationary.Fear of the effects of more than $1 trillion in added Treasury debtthis year has been part of the force behind rising yields.

“One of the concerns is that the deficit will widen,” saidYardeni by phone.

JPMorgan Chase & Co. strategists last month lifted theirforecast for net new Treasury debt in 2018 by about $100 billion,to around $1.42 trillion, after the passage of the tax bill. Netsales in 2017 totaled about $550 billion.

Against a backdrop of solid economic fundamentals --synchronized growth and strong corporate earnings -- investorswould normally step in to buy the dip, but government rates remainunder pressure and this week’s Treasury auctions have underwhelmed,raising the prospect that the debt selloff could resume.

Mnuchin on Tuesday said the increase in debt issuance is notcontributing to market volatility. “The debt markets are one of themost liquid markets in the world and are reacting very well.”

Some economists agree. While the tax plan will increase federalborrowing, it’s not the main driver over the next 10 years, saidBrian Riedl, a senior fellow at the Manhattan Institute and aformer chief economist for Ohio Senator Rob Portman. “Even withoutthe tax cuts, we would be facing a huge deficit this year,” hesaid.

“There’s no appetite in Washington for fiscal discipline,period,” Riedl said. "The election of President Trump has convincedCongress that voters don’t care about the deficits.”

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