Bond Traders Waver as Trump Questions U.S. Government Debt Figures

The election of Donald Trump as the 45th President of the United States has sparked a wave of uncertainty among bond traders, with concerns about his economic policies and their potential impact on U.S. government debt figures. Since Trump's election, bond prices have dropped sharply, leading to higher yields and making it more expensive for the government to borrow money. Investors are worried that Trump's policies, such as corporate tax cuts, sweeping tariffs, and the deportation of millions of immigrants, could cause a resurgence in inflation and lead to surging fiscal deficits.

The U.S. government's deficits and debt growth could become increasingly unsustainable under Trump's proposed policies. If there is no change to existing policies, and key provisions of the 2017 Tax Cuts and Jobs Act (TCJA) expire on schedule at the end of 2025, the U.S. government is set to run a $2 trillion annual deficit for the next decade, bringing its total debt to more than $50 trillion. If the TCJA personal tax cuts are extended, they would add $3.7 trillion to the cumulative debt over the next 10 years. Finally, if the new administration enacts all of Trump's campaign promises, such as eliminating taxes on tips and removing state and local tax (SALT) deduction caps, the 10-year increase in debt would be close to $6 trillion.

Higher total debt means higher spending to fund interest payments. The U.S. government pays about 17% of its revenues to the owners of Treasury bonds. If rates are unchanged, the cost of servicing the federal debt over the next 10 years could grow significantly larger, even with no changes to existing policy. And if rates are higher than they have been in the past decade, which is possible, debt payment could significantly crowd out other government spending, ultimately hindering growth.

Bond traders' concerns about U.S. government debt figures can be compared to those of other major economies by examining their debt-to-GDP ratios and the reactions of bond markets to changes in government policies. Japan, for example, has one of the highest debt-to-GDP ratios in the world, exceeding 200% in recent years. Despite this, Japanese government bonds (JGBs) are considered safe investments, and the Japanese government has been able to borrow at low interest rates. This is partly due to the Bank of Japan's quantitative easing (QE) policies, which have kept long-term interest rates low. However, the high debt levels have raised concerns about Japan's long-term fiscal sustainability.

Greece's debt crisis in the late 2000s serves as a stark contrast to Japan's experience. Greece's debt-to-GDP ratio soared to over 150% in 2010, leading to a loss of investor confidence and a sharp rise in borrowing costs. The Greek government was forced to implement austerity measures and seek international bailouts to stabilize its finances. This experience highlights the risks associated with high debt levels and the potential for bond market turmoil to bring down governments.

The UK's decision to leave the European Union (Brexit) led to significant uncertainty and volatility in the UK bond market. The pound sterling depreciated, and UK government bond yields rose as investors worried about the potential economic impact of Brexit. However, the UK's debt-to-GDP ratio remained relatively low compared to other major economies, and the bond market turmoil was short-lived.

Lessons from these experiences include:

* High debt-to-GDP ratios can raise concerns about a country's fiscal sustainability, but they do not necessarily lead to immediate bond market turmoil or higher borrowing costs, as seen in Japan.
* High debt levels combined with a loss of investor confidence can lead to a sharp rise in borrowing costs and potential fiscal crises, as seen in Greece.
* Political uncertainty and policy changes can cause temporary volatility in bond markets, but the impact may be short-lived if the underlying fundamentals of the economy remain strong, as seen in the UK during the Brexit process.

In the context of the U.S., bond traders' concerns about government debt figures should be evaluated in relation to the country's economic fundamentals, such as its growth prospects, inflation rates, and fiscal policies. While high debt levels can raise concerns, the U.S. has historically enjoyed a strong reputation as a safe investment destination, which has helped it maintain low borrowing costs. However, the U.S. should learn from the experiences of other major economies and strive to maintain fiscal sustainability to avoid potential bond market turmoil and higher borrowing costs in the future.