NEW YORK (Reuters) – Newly elected U.S. President Donald Trump will face budget problems that could threaten the country’s standing in global debt markets, eroding investor appetite for government bonds and raising the country’s borrowing costs government could increase.
U.S. budget deficits and debt would largely rise under both candidates in the Nov. 5 election, according to various estimates, although Democrat Kamala Harris was expected to add less debt than Trump.
The prospect of rising government debt levels as Trump’s fortunes improve in recent weeks helped push U.S. Treasury yields higher as many believe his trade and tax policies will fuel inflation and worsen the U.S. fiscal picture. On Wednesday, as results showed Trump had won the election, yields edged higher, with some citing bond watchdogs, citing investors dumping government debt over concerns about rising deficits. The yield on ten-year government bonds rose to 4.479%.
“We view a Trump presidency as bearish for rates, given increased deficits and higher rates,” said Spencer Hakimian, CEO of macro hedge fund Tolou Capital Management.
A major hurdle for the new administration will likely be the Jan. 2 restoration of the federal debt ceiling, which was suspended in 2023 after lengthy negotiations with Congress.
Washington regularly sets a limit on federal borrowing, which must be approved by a majority of lawmakers. Disputes over debt limits have in the past brought the country to the brink of collapse and damaged the country’s credit rating – a scenario that could happen again in the event of a divided government. Republicans won a majority in the US Senate, but neither party appeared to have an advantage in the battle for control of the House of Representatives, where Republicans currently hold a slim majority.
Barring a quick solution, the Treasury Department will likely have to use its cash reserves and so-called extraordinary measures – or a series of accounting maneuvers – to finance the government until the so-called X date, when it will no longer be able to finance the government . pay all his bills. Some analysts estimate this could be in the second half of next year.
Naomi Fink, global strategist at Nikko Asset Management, expects bond volatility around debt ceiling negotiations even if default is averted.
“It is less likely that the US will actually default than market prices taking into account the probability of an extreme event at some point, which could mean a volatility shock even if a default does not occur,” she said before the election.
Possible ways to protect against government bond volatility could include puts on government bonds or credit default swaps, she added. One-year credit default swaps, which measure the cost of insuring exposure to a U.S. debt default, recently rose to their highest in about a year due to the election and debt ceiling jitters, but fell sharply on Wednesday.
An even earlier budget test could come in December, as temporary funding measures put in place to avoid a government shutdown will ensure government agencies remain funded until December 20.
This could pave the way for a political battle even before the new Congress takes office, Richard Francis, senior managing director at Fitch Ratings, said before the election results.
“That’s another important issue we could potentially look at,” he said. “We could look at the debate (around government financing) going on all year, and then that will become intertwined with the debt ceiling itself, so there will be a lot of messy political battles starting after the elections in mid-December, and then at the end of the year,” he said.
POLARIZATION
Credit rating agencies rank governments and companies based on their ability to repay their debts. Metrics include both economic conditions and governance standards.
Fitch lowered the credit profile of US government bonds by one notch last year, following political mismanagement around the US borrowing limit. A new debt ceiling crisis could negatively affect the country’s rating, Francis said.
The other two major rating agencies, Moody’s and S&P Global Ratings, have highlighted similar concerns.
Moody’s, the last of the three major rating agencies to maintain a top rating for the U.S. government, said in September that U.S. fiscal health is expected to deteriorate.
It cut the outlook for its US triple-A rating from ‘stable’ to ‘negative’ in November 2023. Typically, an outlook is “resolved,” meaning that in the case of a negative outlook, it either makes the outlook stable again or continues with the outlook. a rating downgrade within 18 to 24 months.
S&P Global Ratings reaffirmed its stable outlook for the sovereign rating in March this year, but said the AA+ rating could come under pressure if deficits widen further due to “political inability” to rein in spending or improve tax revenues.
“The weakest component of the rating stands out as the fiscal narrative, as well as challenges in the ability to garner bipartisan support for more structural fiscal measures over the medium term,” said Lisa Schineller, managing director, sector lead, sovereign ratings at S&P. Last month’s webinar.
“The inability to address these issues…could lead to a number of downsides.”
DEBT BALLOON
Even without factoring in the likely extension of all or most of the tax cuts Trump signed into law in 2017, which expire at the end of next year, the public’s national debt could nearly double from $26 over the next decade. trillion by the end of last year, according to projections from the nonpartisan Congressional Budget Office.
The extension of the 2017 tax cuts would add about $4.5 trillion to these projections, according to the CBO.
“The threat of more supply… will continue to put some pressure on the U.S. government’s overall balance sheet,” said Jonathan Duensing, head of U.S. fixed income at Amundi US. “In response, investors will eventually demand a higher premium to be able to lend long to the US,” he said.
The Treasury’s 10-year term premium, a measure of the compensation investors demand for holding long-term government bonds, returned to positive territory for the first time since July in October as election uncertainty weighed on long-term bonds. According to an estimate by the New York Fed, interest rates have since risen to their highest level in one year.
PIMCO, a bond-focused U.S. asset manager, said in an October report that despite the prospect of lower interest rates in the short term, it remained cautious on long-term bonds due to the risk of widening deficits and inflationary trade policies after the presidential election. .
Duensing at Amundi US, speaking before the election results, said what worries him is not so much the risk of government failure, which he sees as unlikely, but that inflation could rise due to budget deficits, reducing the value of investments eroded. in government bonds.
“It’s less about investors getting their money back, it’s really about the value of the dollars you ultimately get paid back in.”
(Reporting by Davide Barbuscia; Editing by Megan Davies, Daniel Wallis and Andrea Ricci)
