J.D. Vance warns of deliberate 'bond-market death spiral' if Trump is elected

By Steve Goldstein

Former President Donald Trump often warns about financial calamities that could ensue if rivals are elected. His running mate says there could be a problem if he is elected.

Speaking to Tucker Carlson, Sen. J.D. Vance, the Ohio Republican and the party's vice-presidential nominee, said one of his big worries is the bond market.

"The thing I really worry about on bond markets is, okay, we have $1.6 trillion to $2 trillion in debt every single year in this country getting added to the national debt. And the only thing that makes that serviceable is that interest rates are still pretty low," said Vance.

"If interest rates go to 8%, and you're spending way more to service the debt than you are on actual goods, services and infrastructure for your country, like that can become a huge spiral that could take down the finances of this country," he said.

Vance said Wall Street could deliberately try to sink a Trump presidency.

"I really worry about the bond markets. Do the international investors, the people who are getting rich off globalization, the people who have gotten rich from shipping our manufacturing base to China, the people who have gotten rich from a lot of wars - do they try to take down the Trump presidency by spiking bond rates?" he asked.

He says a Treasury secretary will have to be able to manage their way through a crisis in real time.

He then gave a comparison to Liz Truss's ill-fated premiership in the U.K. "It would be devastating to the president if you had this bond-market death spiral," he said.

That's a lot to unpack. On the numbers, Vance is roughly correct. Bond yields are lower than where Vance recollects - the 10-year BX:TMUBMUSD10Y has dropped to 3.76% - but the fiscal year deficit will be around $2 trillion (in part, it should be noted, due to the tax cuts Trump signed into law during his first presidency.)

Net interest on the public debt through the first 11 months of the fiscal year has been $870 billion - more than any other program besides Social Security and Medicare, and even more than defense spending.

Famed investor Stanley Druckenmiller - no fan of the current Biden administration - has warned that inflation could surge, and bonds sour in value, in a second Trump administration. He said Trump's attacks on the independence of the Fed could lead to an "Arthur Burns model, times two," a reference to the Fed chair under Nixon.

As for the comparison to Liz Truss, whose premiership was famously outlasted by a lettuce: In September 2022, Truss's chancellor, Kwasi Kwarteng, outlined to Parliament what was called a mini-budget.

In it was the first estimate of bond market issuance that would be needed to fund the government's intervention into the energy market, and it also included unexpected tax cuts for the wealthy. The pound (GBPUSD) plunged in the immediate aftermath - on a Friday - and then nosedived the ensuing Monday, in part due to thin trading conditions in Japan where there was a market holiday.

The Bank of England intervened because many pension funds, at the urging of the government's pension regulator, had leveraged investments in U.K. government bonds, which plunged in value. But the Bank of England set a date for unwinding its support, and the Truss government ahead of the deadline backtracked on most of its fiscal plans.

Truss resigned in the shortest premiership in British history.

Truss has said that a Bank of England report showing the pension fund troubles were the main source of the rise in bond yields shows it was the central bank's fault for the crisis.

-Steve Goldstein

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09-23-24 1009ET

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