Trump’s economic plans face a ‘very unusual’ bond market as the national debt continues to rise
Donald Trump is used to managing debt. But not like this.
As a real estate developer, Trump has relied heavily on borrowed money to finance projects. Debt repayment problems contributed to this six business bankruptcies. Trump retorted by writing off some loans, refinancing others, finding new lenders and changing the business model.
The public debt that Trump will inherit as the 47th president is another problem entirely.
National debt will exceed $36 trillion when he takes office on January 20, up from $20 trillion when he began his first term in 2017. As a percentage of GDP, public debt is jumped from 75% in 2017 to 96% today. These numbers will only get worse. Refinancing is not an option and bankruptcy of the federal government is unthinkable.
The main question is when the markets will start punishing Uncle Sam for his profligate lending – and that may already be happening.
Since last September, the Federal Reserve has cut short-term interest rates by a full percentage point, while long-term rates have risen by a full percentage point. “This is very unusual,” Torsten Sløk, chief economist at private equity firm Apollo, wrote in his Jan. 7 newsletter. “The market is telling us something.” (Disclosure: Yahoo Finance is owned by Apollo Global Management.)
The bond market does not explain itself. But one factor behind rising long-term interest rates could be the Treasury’s endless borrowing. If borrowers issue more debt than investors can absorb, rates must rise. Rates could also rise due to concerns about future inflation. Whatever the reason, higher rates mean higher borrowing costs for home and car buyers and businesses.
And oh yes, the US government also has to pay more, making its fiscal problems even worse.
Read more: Trump’s first year will be filled with fiscal folly.
This debt reduction will hit Trump’s agenda in three ways.
First, the government has reached its borrowing limit, meaning Congress will have to raise the limit by late spring or early summer. It could be an ugly battle, with some Republican budget hawks hanging on, threatening to bankrupt the US.
“Policymakers will ultimately avoid a default, but political dynamics on Capitol Hill could produce one of the more volatile debt ceilings in recent memory,” investment firm BTIG explained in a Jan. 6 analysis.
Second, the debt ceiling settlement could trigger another reduction in the US debt. Standard & Poor’s cut the US debt rating by one notch after the debt ceiling standoff in 2011. Fitch did the same after similar calculation in 2023and Moody’s changed its Outlook for the US rating from stable to negative that same year. The downgrade has not yet damaged US creditworthiness, but markets are becoming increasingly sensitive.
