Dr. Doom "Nouriel Roubini said that if Trump insists on his massive fiscal spending plan, his return to the US presidency may see a resurgence of" bond vigilantes ". Roubini said on Tuesday that if Trump makes his 2017 tax cuts permanent, "market penalties will return very quickly. He said that this may curb more 'radical' economic policies.
Roubini said, "Trump cares about market discipline. If bond yields rise, the stock market rebounds, and bond radicals say your policies are unsustainable - with appropriate economic feedback, they will warn him not to adopt economic policies that are gentler than those radical populists
Roubini said that so far, investors are still trying to determine the exact level of Trump's second term economic policies. Roubini warned before the election that Trump's combination of trade, currency, fiscal, immigration, and foreign policies poses a much higher risk of stagflation than Harris' victory.
He pointed out that Trump's policy plans, including imposing higher tariffs, devaluing the US dollar, and taking a tough stance on illegal immigration, may slow down economic growth while stimulating inflation.
Roubini's pessimism was proven to be foresighted before the global financial crisis, although his predictions during the pandemic underestimated the strength of the economic rebound.
US Treasury yields rise
There is an obvious exception to the recent surge in the US financial market: investors in the US $28 trillion treasury bond bond market sold bonds, pushing the yield to the highest level in several months. The sell-off is a reminder from a powerful group: the so-called 'bond vigilantes' are monitoring Trump, who claims to be the' king of debt ', for claiming to have gained' unprecedented 'power to implement tax cuts and tariff agendas.
The rise in US Treasury rates means that financial markets believe that Trump's policies may trigger inflation and increase federal debt. Higher borrowing costs may in turn affect Trump's economy, slowing down economic growth and other markets.
Senior strategist Ed Yardeni said, "This is a new day for the United States, and also for the bond market. The fact that Trump has won so much support gives him enormous power not only in the United States, but also globally. In a situation where the deficit is already very large, the bond market has reason to worry that fiscal policy will continue to be stimulative
Yardeni coined the term 'bond vigilantes' in the early 1980s to describe investors who attempt to influence government policies by selling bonds or simply threatening to sell bonds.
The yield of 10-year US treasury bond bonds has risen since Trump won the election, once reaching 4.5%. The yield of 10-year US treasury bond bonds is a risk-free benchmark for fixed income securities valued in US dollars with more than 50 trillion dollars worldwide. Yardeni and other investors believe that if Trump's fiscal policies provoke investor anger, the yield may once again hit 5%.
Even without considering the impact of leadership changes, the non partisan Congressional Budget Office predicted in June that the long-term deficit in the United States would increase debt to approximately $48 trillion by the end of 2034. At present, the net interest payment cost is equivalent to 3.06% of GDP, the highest level since 1996.
Last month, the Committee for Responsible Budgeting (CFRB) estimated that due to Trump's deficit increase plan, debt would increase by $7.75 trillion by fiscal year 2035, reaching the current projected debt level. Although the CFRB points out that the scale may range from $1.65 trillion to $15.55 trillion, the possibility of the Republican Party sweeping Congress is increasing - the Senate has already won a majority of seats for the Republican Party, and the Republican Party is also leading narrowly in the House of Representatives - which increases the likelihood that Trump's plan will not be blocked by politicians.
Mark Dowding, chief investment officer of RBC BlueBay Asset Management, said: "Given the size of the deficit and the size of US debt, fiscal policy is more important for us investors."
Prior to last Tuesday's vote, US bond yields and inflation expectations were already on the rise. The 10-year breakeven rate (a market indicator that measures the direction of long-term inflation) soared to a high of 2.43%, the highest level since April this year. Due to Trump's policy agenda being seen as an inflation policy, some economists have predicted that after the Fed cuts interest rates by 25 basis points on Thursday, the subsequent rate cuts will be lower than previously predicted. This may also put pressure on the bond market.