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Trump versus the bond market: president-elect’s campaign rhetoric puts investors on edge | Bonds

DDonald Trump's return to the White House on Monday has put the global economy under stress. Will the 47th President of the United States be able to govern as broadly as last time, when the most extreme threats were finally abated? Or will it be different this time?

While America's corporate titans have stood by the president-elect, serious turmoil is brewing on Wall Street as well, and there are concerns that the most colorful rhetoric of Trump's campaign may soon become reality: the world's largest Investors are concerned that the world's largest economy is at risk of another inflationary shock.

Rising prices reduce the value of the funds available for holding U.S. Treasuries, forcing the market to seek higher returns for holding them. The yield on the 10-year U.S. Treasury (real interest rate) rose from a low of about 3.6% in September to nearly 4.8% last week, but fell to about 4.6% on the back of better-than-expected inflation data. .

Graph showing 10-year US Treasury yields from 2020 to 2025

Rising U.S. borrowing costs reflect investors' concerns about persistently high inflation and interest rates, and the president-elect's policies could exacerbate an already bleak economic outlook. Paul Krugman, Nobel laureate in economics, said this:crazy premium” For the United States in the world market.

“The bond market [is] “I am beginning to suspect that Mr. Trump is who he really is,” he wrote earlier this month.

Experts say President Trump's threat to impose 60% tariffs on China and 20% tariffs on other countries, as well as the prospect of a trade war with Mexico and Canada, which the president-elect refers to as his “51st state,” could drive inflation. They warned that it would be a major stimulus. His proposal to deport illegal immigrants could also choke the U.S. labor supply and add to the pressure.

But investors are hopeful that Trump will soften his approach, especially if bond markets get spooked.

“His ego has made him very sensitive to financial markets,” said Jamie Constable, market strategist at Singer Capital Markets, adding that the next U.S. Federal Reserve meeting on Jan. 29 could be a flashpoint. I think it has the potential to become

“Within nine days in office, he has become quite vocal. I expect a lot of rhetoric about the need for Fed rate cuts. He will rant, but the bond market has There will be opinions,” he says. Constable added that if the US 10-year bond yield rises above the symbolic 5% threshold, it could cause a stock market decline and force the president to “restraint” policy. .

Stocks on Wall Street have soared to near-record highs, fueled in part by expectations that President Trump's tax cuts and deregulation will boost profits for U.S. companies. But Société Générale's chief global strategist Albert Edwards, known in the city as a “super bear” for his pessimistic views, believes the U.S. budget deficit will persist and interest rates will rise. , sees similarities with 1987, when the stock market was in turmoil. Valuations triggered the Black Monday financial crash.

“Eventually, something is bound to come crashing down, just like it did in 1987,” he wrote in a note to clients earlier this month, warning investors to “take extreme caution” over the next year. recommended to pay. “Bond vigilantes are slowly waking up from their Rip Van Winkle slumber, as politicians in the United States (and elsewhere) clearly have no appetite for fiscal tightening.”

President Trump's tax plan has investors worried about America's already ballooning federal budget deficit. The federal deficit will reach $1.8tn (£1.5tn) in 2024, spurred by increased investment through Joe Biden's Inflation Control Act (IRA), pushing the total US debt pile to more than $35tn This is equivalent to 123% of GDP.

Graph showing growth in US Treasury debt from 1975 to present

During the campaign process, the following $7.8 trillion in tax cuts and offset policies only cost $4.7 trillion This is largely due to tariffs, promised by the president-elect, that will put the United States on track for a $3 trillion deficit increase.

There may be little reason to panic. The United States typically enjoys a financial advantage compared to other countries, helped by the dollar's status as the world's reserve currency, and successive administrations have sought to finance ballooning budget deficits by purchasing U.S. government debt, known as the national debt. demand is secured. The U.S. Federal Reserve also helped, buying an unprecedented amount of government bonds since the 2008 financial crisis.

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However, financial calculations can become increasingly difficult. Meanwhile, rising inflation has caused the Fed to shift its focus to exiting the bond market rather than going deeper into it. “The argument that the U.S. government can borrow at an extreme rate because the dollar is the world's reserve currency will probably never hold water,” Edwards said.

Graph showing annual US budget deficit from 2018 to 2024

This week, Treasury Secretary Janet Yellen said the United States was on an unsustainable path.debt crisis” Looking ahead. He attacks Congress for not supporting the outgoing administration's deficit-reduction plan, opposes tax cuts that increase inequality, but says investment is still needed to support the U.S. economy. He said that.

In response, Scott Bessent, the hedge fund manager Trump chose to replace Yellen, has developed a plan known as the 3-3-3. Reduce the federal deficit to 3% of GDP, boost economic growth to 3% and produce an additional 3 million barrels of oil per day by 2028.

Testifying at a Senate hearing last week, Bessent attacked Biden's IRA spending as “out of control,” despite Congress' failure to extend President Trump's trillion-dollar emergency tax cut in 2017. Without it, he said, the United States would face “economic disaster.” This is scheduled to expire in 2025.

But some analysts are skeptical. The Center for American Progress believes Bessent's plan requires: Massive cuts to anti-poverty programs and higher taxes on the middle class.On the other hand, the government once again cut taxes to favor the wealthy.

City investors also say they will closely monitor developments in the bond market.

“We're going to keep a close eye on fiscal policy, which has been extremely important to markets during and post-pandemic, and nowhere more so than in the United States,” said James Bilson, fixed income strategist at Schroders. says.

“Given the demographic headwinds, deficits and debt are expected to explode. For bond markets, this is a problem, and market pricing is clearly responding.”

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