NEW
YORK (AP) -- 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:
"Wrong!"
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 U.S. fixed income 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.
Investors
are demanding more interest to lend to the U.S. 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
federal tax credits to generate $1 trillion from 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.
But
it's hard to contain inflation once it starts revving up. A Trump
presidency, some investors think, makes it more likely the Federal
Reserve will raise short-term borrowing rates next month to keep prices
from rising too fast.
What makes this all unnerving is that the bond market is such a fragile place now.
The
interest that investors are getting on some government bonds is lower
than it has been in hundreds of years. Even a little more inflation
could wipe out gains from collecting that interest over the life of
their bonds, and so many investors are jittery and have moved fast to
dump their holdings.
That
is what happened in trading in the U.S. government bonds in recent
days.
Investors dumped Treasury notes due in 10 years, sending their
yields soaring from 1.75 percent to 2.15 percent in just 36 hours. It
typically takes many months for yields to move that much.
All
this would be bad enough if there wasn't so much debt at risk now. In
the eight years since the peak in borrowing before 2008 financial
crisis, governments, households and companies around the globe have
taken on another $69 trillion in debt, a jump of 53 percent, according
to McKinsey Global Institute.
Given
the complicated global web of bond trading, the danger is that a sudden
drop in the price of bonds could trigger selling across markets and for
many different kinds of assets. In the 2008 financial crisis, a drop in
the value of mortgage bonds sent the prices of stocks and other bonds
plunging as investors scrambled to raise cash by selling even things
they thought were fairly priced.
Of
course, bond investors could be getting the Trump presidency all wrong,
and quickly start buying bonds they were just selling.
A
Republican Congress might reject or at least limit any Trump stimulus
that would entail gobs of additional spending and borrowing. And just
how much Trump wants to spend is unclear because he was so vague on the
campaign trail about his plans, and he has no political record.
James
Abate, chief investment officer of Centre Asset Management, says bond
investors have plenty of reason to worry, though. It's not just Trump's
campaign promises. He spent his business career, after all, as a
developer putting up buildings, and borrowing a lot to do it.
"Project
what he's done his entire lifetime, and think of that on government
level," said Abate. "He's going to issue debt, and that is what the bond
market is spooked about."
___
Bernard Condon can be reached at http://twitter.com/BernardFCondon.
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