A nonpartisan group projects that former President Donald J. Trump’s economic plans would lead to an additional $7.5 trillion in government debt over 10 years, more than twice the $3.5 trillion projected for Vice President Kamala Harris’s plans.
Credit...Kenny Holston/The New York Times

U.S. Bond Market Braces for the ‘Trump Trade’ of Large Tariffs and Deficits

As investors have focused on the potential fiscal and economic impact of the Republican candidate’s proposals, yields on Treasury debt have risen.

by · NY Times

The $28 trillion Treasury market is arguably the most foundational financial market in the world. It’s where the U.S. government auctions its debt to investors who buy and trade that debt, influencing borrowing costs across the globe.

It has also become one of the main places for investors to express their views on the race for the White House.

Vice President Kamala Harris and former President Donald J. Trump have each pledged tax and spending policies that would most likely increase federal deficits, leading to more government borrowing.

But it is Mr. Trump’s proposals — including steep tariffs and extra-large tax cuts — that investors have become focused on, especially as his odds of winning have risen in some betting markets.

His policies have drawn higher estimates of government debt from economists. One nonpartisan group, for instance, has projected that Mr. Trump’s platform would lead to an additional $7.5 trillion in U.S. Treasury debt issuance over a decade — more than twice its estimate for Ms. Harris’s policies.

“Trump wins, you short bonds” — bet that their value will fall and yields will rise further — and “lever up” on stocks, said David Cervantes, the founder of Pinebrook Capital, an asset management firm. He is a believer in what has come to be called the “Trump trade” in finance: a bet that Mr. Trump’s assuming power would boost inflation and interest rates but might also juice corporate earnings in the near term.

The 10-year Treasury yield — the benchmark rate for government borrowing, which in turn affects borrowing for households and businesses — has risen 0.6 percentage points since mid-September, a swift move higher. And Mr. Trump’s odds of victory, as reflected by wagers on the betting site Polymarket, have risen over the same period, finally clawing their way back to where they were before Ms. Harris emerged as the Democratic nominee.

“There is clearly a close relationship between the two,” said Andrew Brenner, head of international fixed income at National Alliance Securities.

But betting markets aren’t predictive of outcomes. And it is hard to disentangle this explanation for the move in Treasury yields from other influences on interest rates: growth expectations, the latest inflation numbers, the inflation outlook, market expectations about Federal Reserve policy, Fed officials’ own data-dependent policy projections and more.

Yields fell over the summer, when unemployment was ticking higher. Fears of a downturn tend to be correlated with lower yields. Yet that trend appears to have reversed based on recent job data. Warren Pies, a co-founder at 3Fourteen Research, is among those who believe this reversal is primarily responsible for lifting yields.

The most recent rise in longer-term Treasury yields has come as the Fed has begun lowering short-term interest rates. And the Fed’s decision to cut interest rates while the economy is still growing has also raised concern among some investors that a tailwind from lower rates could reignite inflation, necessitating higher interest rates in the future.

That concern could intensify should Mr. Trump’s Republican Party gain control of both the White House and Congress — opening a path to put his stimulative policies into place with less legislative resistance.

Along with an ambitious set of tax cuts, Mr. Trump has repeatedly affirmed his promises to greatly raise tariffs. Many expect that such jacked-up import taxes, when combined with higher deficits, will reignite inflation that the Fed has only recently appeared to tame.

“We would see tariffs as adding to inflationary pressures,” said Mark Dowding, chief investment officer at RBC Global Asset Management. “This may make it more challenging for the Federal Reserve to lower interest rates next year, if Trump prevails.”

And that market shift, in turn, could raise borrowing costs for households and businesses.

If investors respond to more debt issuance in a higher-inflation environment by demanding higher yields, that may also raise benchmark interest rates for the U.S. government.

But even with that elevated supply of incoming government bonds in view, some bond managers view the level of debt as a secondary consideration, not the central one.

“We view supply as a passenger and not a driver of U.S. Treasury yields,” Leslie Falconio, head of taxable fixed-income strategy at UBS Global Wealth Management, said of the prospect of increased issuance of government bonds. “It is growth and inflation that are the primary drivers, not supply.”

If inflation expectations — which influence the behavior of key bond investors — manage to stay anchored, even with higher tariffs and deficits, the hefty uptick in debt expected in late 2025 may not matter as much as feared.

And for now “inflation expectations are low,” said David Kotok, the chief investment officer at Cumberland Advisors, even though near-term and long-term expectations for government debt growth are soaring. The inflation-adjusted return expected on buying government debt, in the form of bonds, remains “positive and attractive,” he said.

A trade war — potentially driven by tariffs — or another shock, like geopolitical turmoil that sends oil prices soaring, is on his and other investors’ list of worries. Still, in Mr. Kotok’s view: “No shock, no debt absorption problem.”

For many fund managers, rising yields at a certain point become too attractive to pass up, especially since Treasuries, which pay bondholders in U.S. dollars, are broadly considered the world’s safest assets.

Jim Caron, a leading portfolio manager at Morgan Stanley, was among the large crop of investment managers who swooped in to buy Treasuries when yields zipped to about 5 percent in the fall of 2023 — the last time Wall Street was hand-wringing about inflation and the growing supply of debt.

That buying helped drive the price of Treasuries up, pushing yields back down.

At current levels, a bit above 4 percent, Treasury yields on offer to investors are still “a gift from the market gods,” Callie Cox, the chief market strategist at Ritholtz Wealth Management, argues — especially compared with the low rates of the 2010s.

Those higher rates, however, may also put small businesses hoping for cheaper loans — or aspiring home buyers looking for lower mortgage rates — in a “nasty bind,” she said.

Mr. Caron thinks “it’s conditional in terms of how supply impacts markets” after the election and in 2025, with or without a second Trump term.

“If the economy is slowing and people fear recession, then supply doesn’t matter as much,” he said. “If the economy is growing, then people think inflation will eventually rise. So, supply will matter more.”

Our Coverage of the 2024 Election

Aftermath of the Election

  • Drop-Off in Democratic Turnout: Voters in liberal strongholds across the country failed to show up to vote for Kamala Harris at the levels they had for Joe Biden four years earlier, contributing significantly to her defeat.
  • Seeking Revenge: Donald Trump spent much of the campaign focused on exacting “retribution,” leaving allies and adversaries anticipating a wave of payback after he returns to power.
  • The Trump Insiders: As Trump’s team ramps up the transition process, here are some of the key people who will have an outsized influence on his cabinet.

Presidential Transition

  • Lee Zeldin: Trump will nominate the former New York congressman to lead the E.P.A., a position that is expected to be central to Trump’s plans to dismantle landmark climate regulations.
  • Stephen Miller: The immigration hard-liner and adviser to Trump is expected to be named deputy chief of staff, according to people briefed on the matter.
  • Elise Stefanik: In one of his first cabinet-level personnel decisions, Trump offered the Republican member of Congress from New York the role of U.N. ambassador.

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