Former U.S. President Donald Trump speaks during an Economic Club of New York event on Thursday, Sept. 5, 2024, in New York, U.S.
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Concerns are growing that the US could soon experience Britain’s “money budget” crisis itself, with bond strategists warning that Donald Trump’s return to the White House could bring with it currency volatility and rising inflation. Hoi will bring the specter of bond yields.
President-elect Trump has promised to deliver a litany of pro-growth measures, including tax cuts, higher tariffs, and plans to roll back corporate regulation.
The former president has an economic agenda. Raised concerns Rising consumer prices, which strategists say could lead to significant changes in bond yields and investor behavior.
They warn of a scenario that mirrors the UK’s mini-budget crisis of 2022.
“Foreign central banks and institutional investors, traditional buyers of US 10y Treasuries, are gradually moving away from Treasuries on concerns about deflation linked to inflation, debt and geopolitical concerns,” said Aleem Ramatula, chief foreign exchange strategist. EFG International told CNBC. Email, regarding 10-year US Treasuries.
“As a result, more price-sensitive investors need higher yields to invest in Treasuries. It’s not yet at crisis levels, because [the U.S. dollar] is doing well,” he continued. “But there are concerns that the US could face a contraction in its currency and output similar to what the UK experienced in the fall of 2022.”
Britain’s mini-budget crisis refers to a tumultuous period under former prime minister Liz Truss and former finance minister Kwasi Kwarting.
Shortly after taking office in early September 2022, Truss and Kwarteng caused a crash in government bond prices when they unveiled plans for big tax cuts in an unscheduled fiscal announcement.
The British pound fell to an all-time low against the US dollar after the measures were announced, while the sell-off in UK government bonds was so intense that the Bank of England intervened.
Truss and Kvarting resigned after less than two months in their respective offices over the uproar, and most of the measures were reversed.
‘Investors are getting a bit nervous’
Althea Spinozzi, head of fixed income strategy at Saxo Bank, said Trump’s return to the White House has the potential to reshape the US bond market in “profound ways”, as Treasury yields will rise as markets Inflation is in line with high expectations. .
“A Trump presidency presents a bleak outlook for currency volatility. Concerns about the US fiscal position, tax cuts and increased borrowing to fund spending could trigger a selloff in Treasuries, which Reflects the turmoil seen in the UK in 2022.” Spinozzi said.
“The US dollar’s unique position as the world’s reserve currency and the unprecedented depth of the treasury market provide a degree of flexibility,” he continued.
“That said, a continued rise in yields could weigh on dollar strength over time, especially if inflation expectations become erratic or global investors begin to look for alternatives,” Spinozzi said.
Traders work on the floor of the New York Stock Exchange during the opening bell on November 13, 2024 in New York City.
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The 10-year Treasury yield traded up 4 basis points on Wednesday morning at 4.424%. Yields and prices move in opposite directions, and one basis point is equal to 0.01%.
Bond yields rise when market participants anticipate higher consumer prices or rising budget deficits.
Paul Ashworth, chief North American economist at Capital Economics, told CNBC that while a U.S. version of Britain’s mini-budget episode is possible, the dollar’s position as the world’s reserve currency “would make it difficult to see a sudden crisis.” is.”
“But the so-called term premium component of Treasury yields may be rising, indicating that investors are getting a bit more anxious about swallowing a growing supply of bonds,” Ashworth said.
‘Hard to see happening’
“Of course there’s a possibility of that happening. You can’t rule any of that out,” Thierry Weisman, global interest rates and currencies strategist at Macquarie Group, told CNBC via video call.
“If that happens, it’s likely to result in the U.S. being on its way to deficit spending,” Wiseman said.
“If every country is looking equally irresponsible, the chances of that happening are slim, certainly on a sustainable basis. But when all countries are facing high debt ratios and high deficits, it‘That’s unlikely because there’s really nowhere to run, with the possible exception of physical assets like gold.”
Citing the behavior of private institutional investors, Wiseman said divestment would be necessary to facilitate an American version of Britain’s mini-budget crisis.
“It will take another country, another region like the euro area to replace the United States in terms of fiscal responsibility. It’s hard to see that happening,” he added.
— CNBC’s Jenny Reid contributed to this report.
