Pretty much ever since Donald Trump threw his hat into the ring to run for president about 18 months ago, he’s been blamed for any number of things that have upset some people, no matter how preposterous.
He’s been blamed for recruiting Muslim fanatics to fight for ISIS. He’s been blamed for inciting violence at his own rallies, plus the riots that have followed his election. A middle school teacher in Berkeley, California - where else? - Blamed Trump after she had said she received an anonymous threat from neo-Nazis. I suppose if I spent enough time researching it I could find someone blaming Trump for killing Lincoln and Kennedy, the two World Wars and global warming - you just know he must have had something to do with that!
Now, since his stunning upset victory in the U.S. presidential election, bond yields have spiked to their highest levels since last January, and many people are putting the blame on him for that.
Last week the yield on the benchmark 10-year Treasury note jumped nearly 40 basis points to close the week at 2.15%, its highest level since the beginning of the year. But yields have been rising since well before Trump was elected. Since the end of September, when the experts gave Trump little chance of winning, the yield is up 60 bps. Going back even further, to early July, the yield has since climbed by 80 bps, from 1.35%. So, the most we can “blame” Trump for is the last 40 bps.
According to the blame Trump crowd, rates shot up last week on the belief that the president-elect’s plans for tax cuts and huge infrastructure and defense spending – even if Mexico does pay for his wall – while leaving Social Security and other entitlement benefits alone, will add even more trillions to the federal debt. But we don’t know any of that yet.
What we do know is that the bond market can live with big deficits. I’ve been watching the bond markets for the past 35 years. The two biggest deficit- and federal debt creators during that time – in relation to government spending and the economy at the time – were Reagan and Obama. Yet interest rates were low or coming down sharply in both of their presidencies.
We only have to look at the last eight years, when trillions – yes, trillions – of dollars were added to the federal debt, with not a whole lot to show for it. Yet nobody seemed to mind, including the bond market, since Treasury bond yields fell to record lows under Obama. Last I checked, Trump hasn’t added one dime to that total, since he’s still more than two months’ away from actually taking the oath of office.
Of course, Obama has had a friendly Federal Reserve watching his back and keeping rates at historic lows pretty much the entire time to minimize the damage. It’s quite likely the Fed won’t be so accommodating to Trump, given all he’s had to say about Janet Yellen — “she should be ashamed of herself” — and the rest of the Fed.
But what the bond market does care about is inflation. According to the Fed and the Labor Department, which calculate it and study it, inflation is either nonexistent or nothing to worry about yet. I’m not sure I necessarily believe that – my most recent cable and property tax bills tell me a different story – but that’s the official reading.
The official rate of inflation has been grossly understated in my view, yet 10-year bond yields have averaged comfortably below 2% for the past several years. So why have bond yields suddenly spiked?
According to some, including some members of the Fed, inflation is indeed starting to rise, thanks to the growing and possibly “overheating” economy. We only have to look at the recent flash estimate of third-quarter GDP growth, which came in at a better-than-expected 2.9% annual rate, more than double the previous quarter’s 1.4% pace.
Of course, we have to ask ourselves if that number was legit, seeing as how it was released shortly before the election. The first revised reading, which comes out at the end of the month, I believe will have a more realistic – i.e., lower – reading.
Still, let’s say inflation under President Trump does pick up. Based on last week’s 5.4% gain in the Dow – its best weekly gain in nearly five years – the market seems to believe that he will bring economic prosperity, which might well bring on higher inflation, justifying last week’s sharp rise in bond yields.
If that does prove to be the case, I think most of us will be happy to live with higher interest rates and higher inflation. I think President Trump will be more than happy to take the blame for that.
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
huge debt, government, banks attempt to inflate, bond markets tank, interest rates go up and BANG! anything with associated with debt goes down! Deflation. qed. inflation will never get off the deck
Dr. Lacy Hunt doesn't see this as a reversal of the long term interest rate down trend. The huge total debt outstanding keeps increasing to depress interest rates and deflation long term. I plan to add to the Hoisington U. S, Treasury Bond fund as soon as funds are available. Check out Lacy's recent update on the outlook for the next 12 - 15 months for the long maturity treasuries. Also, a recent WSJ article on 11/16/16 by Ben Eisen is well done.