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US Treasuries risk a brutal sell-off if an election victory for Donald Trump in November is accompanied by spending jitters similar to those that sparked the 2022 gilts crisis that ended the UK premiership of Liz Truss, Europe’s largest fund manager has warned.
Vincent Mortier, chief investment officer of €2.1tn Amundi, told the Financial Times that while a Trump victory could be taken initially as positive news for risky assets, “then quickly the bond market will remind everyone that not everything is possible — as happened in the UK with the ‘mini’ Budget of Liz Truss”.
While neither Trump nor President Joe Biden have laid out detailed policies — or are yet officially their parties’ candidates — the former president campaigning again for the White House has previously supported big tax cuts.
Mortier’s alarm comes as warnings over budget deficits have multiplied in recent weeks, including from Federal Reserve chair Jay Powell who on Sunday offered a rare opinion on government policy when he told CBS’s 60 Minutes that the US was on an “unsustainable fiscal path”.
The Congressional Budget Office, Congress’s independent fiscal watchdog, on Wednesday predicted the US deficit would soar by almost two-thirds in the next decade to $2.6tn, with government interest payments accounting for three-quarters of the rise.
Investors fear already-high spending has reduced Washington’s ability to shrug off the effects of a big increase in Treasury bond yields on budget plans. The CBO forecast benchmark 10-year rates peaking at 4.6 per cent next year.
“We know that the US cannot afford to have long-term rates at, say, 5 per cent or more given the cost of the debt,” Mortier added. “A party in the equity market can be stopped by the bond market for sure.”
In 2022 Truss’s stint as prime minister lasted just 49 days after her £45bn tax-cut plan, without any reduction in spending, triggered turmoil that pushed up benchmark UK borrowing costs by a percentage point in less than three weeks.
Others who have recently warned about US debt include Nassim Nicholas Taleb, author of Black Swan, a book about the impact of seemingly improbable events, who told an event in Florida last week that unless the US changed its fiscal course a debt spiral was a “white swan” event — that is, highly probable.
Some investors were taking action, Mortier cautioned, with several Japanese and Korean investors telling him recently that they were for the first time reinvesting the proceeds from maturing Treasuries in the bonds of big US multinationals, not in new government debt.
“I was very surprised because these are big guys,” he said. “But the safe asset for them is no longer the sovereign.”
Roughly a quarter of the $26tn Treasury market is held by foreigners, government data show. Japanese investors lead with holdings of $1.1tn while China is the next largest holder with $782bn — both of which include government and private investors.
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