JEFFREY FRANKEL
When the US presidential election was called for Donald Trump, the yield on ten-year US government bonds increased from 4.3% to 4.4%, and the 30-year-bond yield rose from 4.5% to 4.6%, with both remaining at those levels ten days later. As the bond market declined – higher yields mean lower prices – the stock market rose. Clearly, investors expect the next Trump administration to produce higher government budget deficits and more debt.
It is not difficult to see why. During Trump’s first term in office, he added $8 trillion to the national debt – all previous presidents combined had accumulated $20 trillion – despite having promised to run budget surpluses so large that they would eliminate the national debt within two terms.
In the campaign, he vowed to cut taxes for seemingly every group that caught his fancy. According to the Committee for a Responsible Federal Budget’s central estimate, Trump’s tax proposals imply $10 trillion in foregone revenue over the next ten years. Add to that an extra $1 trillion in interest accrued on the national debt, and the losses far exceed the $3 trillion in added revenue that would come from the sky-high tariffs that Trump has pledged to introduce. This will require the federal government to sell a lot of bonds – a practice that will keep their price low and interest rates high.
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