Donald Trump is scaring the moneymen. The former US president’s attempt to return to the White House is raising eyebrows on Wall Street, including among the so-called bond vigilantes.
Coined by veteran investment strategist Ed Yardeni in the 1980s, the term describes debt traders who punish profligate politicians by selling bonds.
This pushes their value down, lifting borrowing costs and making it more costly for governments to issue new bonds.
Liz Truss knows them well.
The former prime minister’s decision to press ahead with a radical tax-cutting drive without a plan to slash spending was rejected by financial markets, forcing her to trade in one chancellor for another before prompting her departure.
There are fears that history could repeat itself once again, with a potential US bond crisis having global ramifications for debt and borrowing costs.
Concerns over US debt sustainability were laid bare this week by the Congressional Budget Office (CBO).
The US is expected to borrow the equivalent of 6pc of GDP every year for the next decade to plug the gap between taxes and spending.
The pressures of an ageing population and higher borrowing costs will also see the size of America’s debt pile soar to 172pc of GDP by 2054.
Total US debt is now so big that in 2024, US President Joe Biden will spend more on interest payments to service federal debt than it spends on defence.
Trevor Greetham at Royal London Asset Management says Trump would probably continue the era of profligacy, and may even turbocharge it.
Greetham says a second Trump presidency would probably involve tax cuts that were “a lot more extreme because he would think he has nothing to lose.
“It is his second term, he cannot get a third term unless he changes the constitution, he can’t easily do that, so I think he would be more forceful,” he says. “Trump’s [first term] was more sound and fury than anything else.
“There was a massive tax cut for billionaires which worsened the fiscal position tremendously, but other than that, it was just lots of noise.”
César Pérez Ruiz, chief investment officer of Pictet, which manages £600bn in assets, says he’s unwilling to touch any US bonds dated longer than five years because of the uncertainty of what a second Trump presidency may bring.
“Why? Because we have US elections [in November],” he says. “If Trump comes back, and he comes with aggressive tax cuts, we could have another Truss moment in the US because of debt sustainability concerns. The bond vigilantes are back, we need to be disciplined.”
Even the technocrats are sounding the alarm. Jerome Powell, the head of the US central bank warned earlier this week that “the US federal government’s on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy. So, it is unsustainable.”
History suggests a Trump presidency may not be bad for the stock market.
After all, when you compare Trump’s first three years in office to Biden, the S&P 500 rose 43.1pc under Trump, compared with 23.9pc under his successor, according to analysis by the Facts First think-tank.
Bond yields also fell under Trump and have climbed since Biden took office.
However, analysts say the former was driven by expectations during the pandemic that interest rates would remain low for the foreseeable future, while the latter was owed to the Fed’s subsequent aggressive interest rate hikes.
Matthew Morgan, head of fixed income at Jupiter, says Trump’s record is clear: “If you look at last time, his economic record was pretty positive for investors, whereas a Biden outcome has seen [an] economic performance that has been less than that.”
While tax cuts could provide a sugar rush, Vincent Mortier, chief investment officer of Amundi, Europe’s largest fund manager, says investors are likely to punish any yawning fiscal deficit.
He told the Financial Times: “We know that the US cannot afford to have long-term rates at, say, 5pc or more given the cost of the debt. With benchmark 10-year borrowing costs at 4.1pc and 20-year debt yielding 4.5pc, caution is warranted.”
Mortier added. “A party in the equity market can be stopped by the bond market for sure.”
Jan Nevruzi, US rates strategist at NatWest, notes that US 30-year yields rose almost 0.4 percentage points the week of the 2016 election and a subsequent additional 0.2 percentage points in the weeks immediately after.
“The market may move in a similar direction this time as we move through the GOP nomination process,” he says.
However, Nevruzi is more relaxed about the prospect of bond markets seizing up. “I think in the US, the investor base is a little broader,” he adds.
For now, Trump is keeping his campaign pledges close to his chest. Greetham at Royal London Asset Management says prudence is unlikely to be top of the agenda.
“We don’t really know exactly what his policy package looks like, and I am not sure he knows it yet either,” he says. “I wouldn’t expect a lot of consistency.
“I certainly wouldn’t expect him to go down the austerity route. History is littered with examples of Republican administrations blowing the budget and then Democrat administrations fixing it.
“I wouldn’t expect Trump to remotely do anything to try to rein things in, so in that sense it is probably more inflationary, probably better for stocks than bonds.”
Either way, the stakes are high.
Speaking last month, Thomas Donilon, the chairman of Blackrock Investment Institute (BII), noted the clear choice facing voters in November’s election.
He said: “You couldn’t really have two more different approaches to government and the approach to the presidency than President Trump and President Biden.
“The issues which are significant to investors include trade and taxes and regulation and climate and international relations generally. So that for us, and the world, is an important event in 2024 in a year of elections.”