Former US President Trump attends an event at the Economic Club of New York on Thursday, September 5, 2024 in New York, USA.
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Concerns are growing that the United States may soon experience a British version of a “mini-budget” crisis, with bond strategists warning that Donald Trump’s return to the White House will bring worries about currency volatility and soaring bond yields.
President-elect Trump has promised a series of pro-growth measures, including tax cuts, steep tariffs and plans to deregulate businesses.
Former President’s Economic Agenda Concerns intensify Strategists say rising consumer prices could trigger major changes in bond yields and investor behavior.
They warned that the scenario of a UK mini-budget crisis in 2022 was not impossible.
Alim Remtulla, chief foreign exchange strategist at EFG International, told CNBC: “Foreign central banks and institutional investors are traditional buyers of U.S. 10-year Treasury bonds, which have been triggered by factors such as inflation, debt and geopolitics. Concerns about currency devaluation are slowly diversifying away from U.S. Treasuries.
“So investors who are more price-sensitive need higher yields to invest in Treasuries. This is not yet at crisis levels because (the U.S. dollar) is outperforming,” he continued. “But there are concerns that the U.S. currency and yields could experience a run similar to what the U.K. experienced in the autumn of 2022.”
The UK’s mini-budget crisis refers to a tumultuous period under former Prime Minister Liz Truss and former Finance Minister Kwasi Quarten.
Shortly after taking office in early September 2022, Truss and Quarten proposed significant tax cuts in an unscheduled fiscal announcement, triggering a plunge in government bond prices.
After the measures were announced, the pound fell to a record low against the dollar, British government bonds sold off severely, and the Bank of England intervened urgently.
Truss and Quarten resigned amid the riots after less than two months in each office, and most of the measures were reversed.
‘Investors are getting a little nervous’
Althea Spinozzi, head of fixed income strategy at Saxo Bank, said Trump’s return to the White House has the potential to “profoundly” reshape the U.S. bond market, with U.S. Treasury yields rising as the market adapts to higher inflation expectations.
“A Trump presidency would also bring concerns about currency volatility. Increased borrowing to fund tax cuts and spending has heightened concerns about the U.S. fiscal position, potentially fueling concerns about a sell-off in U.S. Treasuries, similar to what will happen in the U.K. in 2022 The turmoil is similar.
“The U.S. dollar’s unique status as the world’s reserve currency and the unparalleled depth of the Treasury market provide a degree of resilience,” she continued.
“Having said that, a sustained rise in yields could impact the strength of the dollar over time, particularly if inflation expectations become unstable or global investors begin to look for alternatives,” Spinozzi said.
Traders work as the New York Stock Exchange opens on November 13, 2024 in New York City.
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On Wednesday morning, the 10-year Treasury yield rose more than 4 basis points to 4.424%. The yield and price move in opposite directions, with 1 basis point equal to 0.01%.
Bond yields tend to rise when market participants anticipate higher consumer prices or larger budget deficits.
Paul Ashworth, chief economist for North America at Capital Economics, told CNBC that while a U.S. version of Britain’s mini-budget event was possible, the U.S. dollar’s status as the world’s reserve currency “makes a crisis very unlikely.” It doesn’t happen suddenly.”
“But the so-called term premium component of U.S. Treasury yields is likely to increase, suggesting investors are a little nervous about swallowing increased bond supply,” Ashworth said.
‘It’s hard to see what’s happening’
Thierry Wizman, global rates and currency strategist at Macquarie Group, told CNBC via video call: “Of course, it’s possible that this could happen. You can’t rule it out. “
“If this does happen, it will most likely be the result of the U.S. going its own way on deficit spending,” Weitzman said.
“If every country behaves equally irresponsibly, then the likelihood of that happening is slim, certainly on a sustainable basis. But when all countries experience high debt ratios and high deficits, then‘Less likely, since there’s really nowhere to escape, except for physical assets like gold.
Turning to the behavior of private institutional investors, Weizmann said disagreement was necessary to contribute to a US version of Britain’s mini-budget crisis.
“It will take another country, another region, like the eurozone, to replace the United States in terms of fiscal responsibility. That will hardly happen,” he added.
—CNBC’s Jenni Reid contributed to this report.
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