Vice presidential candidate JD Vance worries that the risk of a surge in U.S. Treasury yields would trigger a "death spiral" in the U.S. bond market and ultimately "destroy the country's finances."
Vance expressed this view in a recent interview with conservative political commentator Tucker Carlson, adding that if he and Trump win the November election, the next four years will not be "plain sailing" due to the risk of a surge in U.S. Treasury yields.
“I do worry that the bond markets, the international investors, the people who have profited from globalization, the people who have gotten rich by moving our manufacturing base, the people who have gotten rich by a lot of wars, will they try to bring down the Trump administration by driving up bond yields?” Vance said.
Vance's concerns stem from the cost of servicing the U.S.'s $3.5 trillion debt, which will become the federal government's fourth-largest expense in 2023 at $659 billion, up 38% from $476 billion in 2022.
The U.S. government’s spending on net interest on the debt is expected to surpass defense and Medicare spending by 2024 to become the second-largest expense after Social Security, according to the Committee for a Responsible Federal Budget.
Vance worries that spending could swell further if bond yields rise.
"We have about $1.6 to $2 trillion of debt being added to the Treasury every year," Vance said. "The only thing that makes that debt manageable is that yields are still relatively low. They're about 4.5% right now. If yields go to 8%, then what you're spending on servicing that debt is going to be far more than what you're spending on domestic goods, services and infrastructure, and it's going to be a huge spiral."
As for how rates could rise to 8%, Americans have long worried that foreign countries could sell off their Treasuries all at once, triggering an imbalance between supply and demand and causing yields to surge (bond yields rise as prices fall).
Vance mentioned the resignation of former British Prime Minister Liz Truss in 2022 as an example of how this could happen.
“She came into office with a plan, but I think the Bank of England made a lot of mistakes, perhaps deliberately, interest rates skyrocketed, and her government was brought down in a matter of days,” Vance said.
Steve Sosnick, chief strategist at Interactive Brokers, noted that this concern is not new, and Vance is expressing the worries that have been haunting bond market investors like a ghost.
Sosnick said that in his recent conversations with bond investors, the discussion "ultimately turned to when long-term bond yields might reflect concerns about our ability to repay our debt."
He added: "The consensus is that it may happen someday, but no one knows when. If it does happen, it will probably be sudden."
Sosnick also mentioned that the same concerns have been raised in Japan for decades but have not yet been realized.
As for the spike in UK interest rates that affected Liz Truss, that “was a problem specific to the way UK pension funds handle their interest rate risk, not a crisis of confidence in the creditworthiness of UK gilts in general,” Sosnick explained.
Ultimately, Vance’s concerns about U.S. debt and the potential for a surge in interest rates “are not nonsense,” Sosnick said, but investors should take those comments with a grain of salt when they come from politicians of either party.
“If these comments are made with analysis, they should be part of a responsible discussion about debt and deficits,” Sosnick said. “But when politicians from either party raise issues without offering solutions, it looks more like intimidation or blame-shifting than a pursuit of responsible policy.”
The article is forwarded from: Jinshi Data
