The bond market is warning investors about the potential economic impact of President-elect Donald Trump’s tax plan, which would extend and expand tax cuts for corporations and the wealthy. The 10-year U.S. bond yield has risen significantly since Trump’s election, with the rate increasing from 4.29% to 4.76%.
Experts say that the bond market is reacting to concerns about inflation, which could be driven up by Trump’s policies. Stricter immigration controls or mass deportations could increase labor costs for businesses, while tax cuts would boost budget deficits and increase government debt.
Mark Zandi, chief economist at Moody’s Analytics, warned that investors are worried about the economic impact of Trump’s plans, saying “The bond market is sending a message that investors are worried about the economic policies dead ahead.”
Douglas Holtz-Eakin, president of the American Action Forum, noted that the rise in longer-term rates could indicate that investors believe interest rates will be higher in the future, or that they are concerned about the U.S.’ ability to pay its debts.
The bond market is also reacting to concerns about the debt limit, which Congress will need to raise or suspend this year to avoid defaulting on U.S. debt. The House GOP has proposed a $1.5 trillion boost in the limit paired with a $2.5 trillion 10-year spending cut, but some economists believe that a hike of twice as large would be needed to prevent an economy-destroying default.
Experts say that the bond market is sending a warning to the Trump administration about the potential impact of its policies on the economy. With the fiscal picture much worse now than in the 1990s, when the “bond market vigilantes” trimmed Clinton’s sails, experts warn that the U.S. debt-to-GDP ratio is headed north quickly, and that tax cuts would exacerbate this trend.
Source: https://www.huffpost.com/entry/how-wall-street-could-wreck-the-gops-tax-cut-plans_n_678302bde4b0762d26832148