How bond vigilantes could check Trump's power

NEW YORK/LONDON (Reuters) - When Bill Clinton began his first term as president in 1993, he faced a challenge to his authority from an unexpected adversary: bond traders. Low taxes and high defense spending over the prior decade had contributed to U.S. debt doubling as a share of economic output.

Clinton and his advisers worried that 'bond vigilantes' – so called because they punish governments' profligacy – would target the new Democratic administration. A run on U.S. Treasury bonds, they feared, could sharply raise borrowing costs, hurting growth and jeopardizing financial stability. A frustrated Clinton was forced to make the unpopular decision to raise taxes and cut spending to balance the budget.

"He went away pretty disgusted with the idea that here he had just won an election by a pretty nice margin in a difficult three-way race, and now he was subservient to a bunch of bond traders," said Alan Blinder, one of Clinton's closest economic counselors who later served as the vice chair of the Federal Reserve. "A lot of us are wondering if the bond market vigilantes are going to come back for a second chapter."

As Donald Trump takes office on January 20, concerns over bond vigilantes in the United States have resurfaced, according to several market experts. And this time, the economic indicators are even more alarming, they said.

The U.S. debt-to-GDP ratio is pushing 100%, double the level in Clinton's time. Left unchecked, by 2027 it's projected to exceed the records set after World War II, when the government borrowed heavily to fund the war effort.

Bond yields, which move inversely to prices, have been climbing. The yield on 10-year U.S. Treasury bonds has risen more than a percentage point from a September low, a whopping increase for a measure where even hundredths of a percent matter.

Like Clinton before him, Trump now faces the prospect of bond vigilantes becoming a potent check on his policy agenda, according to several former U.S. and foreign policymakers who faced market turmoil while in office.

Reuters interviewed nearly two dozen policymakers, economists and investors – including Trump advisers, a former Italian prime minister and former Greek and British finance ministers – and examined bouts of bond market routs around the world since the 1980s to assess the risk of turbulence after Trump takes office.

The review found several indicators watched by bond traders are flashing red. U.S. federal debt has increased to more than $28 trillion, from less than $20 trillion when Trump took office in 2017. Debt is also piling up in other countries, with the world’s total public debt expected to cross $100 trillion for the first time in 2024, leaving investors nervous.


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