U.S. fiscal risks may lure bond vigilantes
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U.S. FISCAL RISKS MAY LURE BOND VIGILANTES
U.S. Treasury yields jumped as investors worried a possible Republican sweep of Congress and the White House could stoke inflation and weaken U.S. public finances.
The current market consensus is that Donald Trump's policies on immigration, tax cuts, and tariffs would put upward pressure on inflation, leading the Federal Reserve to slow down its monetary easing path.
"For a start, there's a faint whiff of the 'bond vigilantes' in the sharper rise in yields at the long end of the Treasury curve," says Thomas Mathews, head of markets Asia Pacific at Capital Economics.
"Republican control of the House would increase the chances of a bigger stimulus package," he adds.
He also recalls that fiscal risks are plainly higher than during Trump's first term, when the 10-year Treasury yield was around 1.8% and the debt-to-GDP ratio at 75%. Now, yields are 4.4%, and outstanding debt is around 100% of GDP.
"Our base case remains that the dollar's reserve status will prevent fiscal worries from growing too great," he says.
"And if the bond vigilantes did rear their heads, Republican appetite for tax cuts would probably diminish."
Trump was elected president on Wednesday, capping a remarkable comeback four years after he was voted out of the White House.
(Stefano Rebaudo)
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