Sur­pris­ing mes­sage from bonds about a Trump pres­i­dency

Kuwait Times - - BUSINESS -

He’s called the spi­ral­ing fed­eral debt a dis­as­ter, leads a party of avowed fis­cal hawks and has promised to bal­ance the bud­get.

But if you ex­pect Don­ald Trump to act as a model of fis­cal rec­ti­tude as pres­i­dent, the bond mar­ket has a mes­sage for you, and a very Trumpian one at that:

In­vestors have been yank­ing money out of bonds around the world since Trump’s vic­tory be­came ap­par­ent early Wed­nes­day, send­ing prices tum­bling and wip­ing out sev­eral months of gains. They ex­pect higher debt, higher in­fla­tion and higher in­ter­est rates - all neg­a­tives for bonds.

Bond in­vestors can get things hor­ri­bly wrong, and it’s only been a few days. But for a nor­mally calm mar­ket, a sort of sleepy cousin of the stock mar­ket that has been mostly ris­ing, it’s been a stun­ning turn of events. “The bond mar­ket is sup­posed to be a dull, bor­ing, sta­ble place,” said Colin Lund­gren, head of US fixed in­come trad­ing at Columbia Thread­nee­dle In­vest­ments. “In­stead, it’s been at the cen­ter of the storm.”

Af­ter years of too lit­tle in­fla­tion, in­vestors are wor­ried that Trump will in­ad­ver­tently kick off too much and send the national debt up sharply. If that hap­pens, he could do some­thing long fore­cast, and much feared: kill off the three-decade-long bond bull mar­ket that has lifted prices so high, and pushed bor­row­ing rates so low, many ex­perts think it’s a bub­ble ready to pop.

At the very least, in­vestors are de­mand­ing more in­ter­est to lend to the US gov­ern­ment now be­cause they fear higher in­fla­tion is com­ing as Trump opens the spend­ing spig­ots to get the econ­omy to grow faster. He’s promised to de­liver 3.5 per­cent growth a year. That is much faster than the av­er­age 2 per­cent or so re­cently, and higher than many econ­o­mists think pos­si­ble on a sus­tained ba­sis. To get there, Trump says he’ll slash reg­u­la­tions and taxes, and use $1 tril­lion from pub­lic and pri­vate sources to fix and ex­pand the na­tion’s roads, bridges, air­ports and tran­sit sys­tems. That has helped send stocks higher in an­tic­i­pa­tion of big­ger cor­po­rate prof­its.

But the coun­try will likely need to bor­row more un­der Trump’s plans - a lot more, ac­cord­ing to es­ti­mates from the non-par­ti­san Com­mit­tee for a Re­spon­si­ble Fed­eral Bud­get. It says the com­bi­na­tion of higher spend­ing and lower taxes will add $5.3 tril­lion to the na­tion’s debt over the next decade. That is on top of the nearly $20 tril­lion in debt that bal­looned un­der Pres­i­dent Barack Obama and his pre­de­ces­sor Ge­orge W. Bush.

The Trump cam­paign says his spend­ing won’t be a prob­lem be­cause faster growth will in­crease tax rev­enue even at lower rates. Michael Le­witt, a bond fund manager who says he voted for Trump, isn’t buy­ing it. “Cut­ting taxes and spend­ing more money and not re­form­ing en­ti­tle­ments, that’s go­ing to send debt through the roof,” said Le­witt of the Credit Strate­gist Group. “The mar­ket is say­ing he is not go­ing to worry about this, and that’s go­ing to be bad for bonds - re­ally bad for bonds.”

An­other pos­si­ble prob­lem for bond hold­ers is Trump’s pro­tec­tion­ist lean­ings.

On the cam­paign trail, he threat­ened to slap tar­iffs on Chi­nese and Mex­i­can goods and rip up trade pacts. If he fol­lows through, that could stoke in­fla­tion by send­ing prices of im­ported goods sharply higher. Bond in­vestors loathe in­fla­tion be­cause it erodes the pur­chas­ing power of their fixed pay­ments. A lit­tle more in­fla­tion might be a good thing, of course. If any­thing, the world has been suf­fer­ing from too lit­tle of it. Con­sumer prices have risen 1.5 per­cent in the past year, about a half point lower than what is con­sid­ered the ideal level.

Higher in­fla­tion is usu­ally a sign of faster economic growth, and it has a way of build­ing on it­self. It causes peo­ple to spend right away on things out of fear they might have to pay more for them later, and that can stim­u­late even more growth. — AP

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