Trump’s Policy Proposals and the Looming Threat to U.S. Treasury Market Stability

The U.S. Treasury market, long a cornerstone of global financial stability, now faces a confluence of risks stemming from Donald Trump’s 2024 policy proposals. These proposals—centered on tax cuts, deregulation, and protectionist trade policies—threaten to destabilize bond markets and drive up interest rates, with cascading effects for investors and the broader economy.

Fiscal Expansion and the Debt Burden

Trump’s plan to extend the 2017 Tax Cuts and Jobs Act (TCJA) and slash the corporate tax rate to 15% would reduce federal revenue by billions, exacerbating deficits. According to the Wharton School, these measures could increase primary deficits by $5.8 trillion over the next decade on a conventional basis, or $4.1 trillion when accounting for economic feedback effects [1]. Such fiscal expansion mirrors historical patterns, such as the 2020 pandemic-era spending sprees, which saw Treasury yields rise as investors priced in inflation and liquidity risks [3].

The distributional impacts of these tax cuts further complicate the picture. While the top 5% of earners would benefit, the middle 20% of households face a 2.1% income tax increase, and the poorest 20% a 4.8% hike [4]. This regressive dynamic could strain consumer demand, yet the long-term fiscal costs—namely, a ballooning debt-to-GDP ratio—pose a more immediate threat to Treasury market stability.

Deregulation and Trade Wars: A Double-Edged Sword

Trump’s deregulatory agenda, including rolling back green energy mandates, could temporarily boost traditional energy sectors but risks long-term environmental and financial instability [2]. Meanwhile, his proposed universal tariffs on imports—particularly on Chinese goods—would raise household costs and invite retaliatory measures. Analysts estimate these tariffs could impose an average tax of $1,300 per U.S. household in 2025 and $1,600 in 2026 [3]. Such measures could erode confidence in U.S. fiscal discipline, prompting foreign investors to divest Treasuries and further straining demand for government debt [4].

The Fed’s Dilemma: Politics vs. Credibility

Trump’s push for a “dovish” Federal Reserve, including the controversial appointment of Stephen Miran—a vocal critic of central bank independence—raises concerns about political interference in monetary policy [2]. If the Fed prioritizes short-term economic gains over inflation control, it risks undermining its credibility. Historical precedents, such as the 2020 fiscal expansions, show that premature rate cuts in the face of persistent inflation can lead to sharp spikes in long-term Treasury yields [3]. The 10-year yield, a benchmark for mortgage and business loan rates, could rise by 1.2 percentage points by 2054 under current fiscal trajectories [2].

Investor Behavior and Market Liquidity

The Treasury market’s resilience has been tested by structural shifts in investor behavior. Traditional intermediaries, such as securities dealers, have reduced market-making activities post-2008, while private funds and foreign holders now dominate. During periods of fiscal deterioration, as seen in 2020, investors have sold Treasuries to secure liquidity, causing yields to spike and market functioning to falter [3]. Trump’s policies could exacerbate these vulnerabilities, particularly if foreign holders lose confidence in U.S. debt.

Conclusion: A Perfect Storm for Bond Markets

Trump’s proposals create a volatile cocktail of fiscal expansion, political interference in monetary policy, and trade-driven inflation. The resulting surge in deficits, coupled with eroding investor confidence and a politicized Fed, could push Treasury yields to multi-decade highs. For bond investors, the risks are clear: higher borrowing costs, reduced liquidity, and a steeper yield curve. As the 2024 election approaches, markets will closely watch how these policies unfold—and whether the Fed can maintain its independence in the face of political pressure.

Source:
[1] The 2024 Trump Campaign Policy Proposals: Budgetary, Economic and Distributional Effects [https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024]
[2] Long-term Impacts of the One Big Beautiful Bill Act [https://budgetlab.yale.edu/research/long-term-impacts-one-big-beautiful-bill-act]
[3] What's going on in the US Treasury market, and why does it matter? [https://www.brookings.edu/articles/whats-going-on-in-the-us-treasury-market-and-why-does-it-matter/]
[4] A Distributional Analysis of Donald Trump's Tax Plan – ITEP [https://itep.org/a-distributional-analysis-of-donald-trumps-tax-plan-2024/]