How the bond market could check Trump's power
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This is On Point. I'm Magna Chakrabarty. Well, it happened. President Donald Trump made good on what he said is his, quote, favorite word. The, quote, most beautiful word in the world to him. Tariffs.

Donald Trump's 25% tariff on imports from Mexico and Canada went into effect today. Tariffs on imports from China are now 20%. All three countries have struck back with their own tariffs on U.S. goods.

Commerce Secretary Howard Lutnick scoffed on CNBC this morning. You've got China's got huge tariffs on us, huge tariffs on everything with us. And Canada, you just talked about why do we produce cars in Canada? They've had an invitation. Canada and Mexico had an invitation to trade with the amazing economy of the United States of America. And they have abused that policy.

Well, there is pretty vocal disagreement coming from many sectors of the business community and market watchers. Douglas Holtz-Eakin is president of the Conservative American Action Forum. He's also former director of the Congressional Budget Office. He was on CNBC, too, this morning, and he scoffed as well.

but at Lutnick's claims. The issue here is not just that the president is going to levy these tariffs on Mexico, China, Canada. It's that there's, in sort of the analogy of the Fed, there's no forward guidance. No one knows what the endpoint is.

How high do they go? Why do they go that high? How do you make a plan in this environment? That's terribly upsetting to markets, very bad for the business community as well. OK, you couldn't quite hear it there at the end, but Holtz-Eakin said that's terribly upsetting for markets and the business community as well.

So about those markets. Today, we're going to focus on one corner of the market, a, to put it in Latinx terms, hugely important one. So much so that analysts have called it, quote, Trump's fiercest opponent or the most powerful check on Trump's economic agenda or the market that's flashing a warning sign on what Donald Trump hopes to do for the United States economy.

And that corner of the market is the bond market. And to understand it better, we're joined by Ken Kuttner. He's professor of economics at Williams College and also a former research economist at the U.S. Federal Reserve. Professor Kuttner, welcome to On Point. On Point.

Thanks. Nice to be with you, Magna. So we're going to dive into some economic and political analysis a little bit later. But today I'm also kind of on a mission to help raise the personal finance awareness of all On Point listeners. So let's do some Bond Market 101. Starting from the very, very, very beginning. What is a bond?

What is a bond? Well, let's back up even a step behind that, Meghna. Suppose I gave you $1,000 and in return you gave me a piece of paper saying you would give me $1,000 plus interest one year from now. You would call that piece of paper a loan contract. If I wanted to get my $1,000 back next month, I'd be out of luck. My money would be tied up for an entire year. Now suppose instead I give you $1,000 but you said on the piece of paper that you would pay principal and interest one year from now to anyone who bought the piece of paper.

Anyone who brought you the piece of paper should say, in theory, I could sell that piece of paper to somebody else and get my money back before the agreed upon repayment date. And that's a bond. It's like a loan contract, but it can be bought and sold in the marketplace. Gotcha. OK, so we have all sorts of bonds, right? There's municipal bonds that cities often use, the corporate bonds and bonds from the federal government. Am I missing a big sector of bonds in that group?

No, really corporate and municipal and government bonds would be the main groups. OK, so then tell me when it comes to we want to focus on those treasury bonds. Who's buying them?

Oh, boy. You might as well ask who's not buying the Magda. The government debt market is really – it's one of the deepest and most liquid markets in the world. Banks hold them. All kinds of institutional investors hold them. I hold them indirectly in my 401K. It's hard to find anybody who doesn't have some piece of government debt in their portfolio. We're also talking about – or we hear frequently about other countries owning a lot of US treasury bonds. Is that right? Yeah.

Oh, yeah. No, a lot of other central banks and governments hold a lot of U.S. Treasury debt. People's Bank of China, they won't tell you exactly how much they hold, but it's got to be in the trillions. And why would China want that?

Well, it's part of their foreign exchange reserves. They like to hold dollars so they can manage their exchange rate primarily. Okay. So what I'm trying to figure out here is it's so funny because you're right. Like many people have bonds maybe in their portfolios, in their 401ks or IRAs, and they're supposed to serve a specific purpose, right? It's the whole fixed income portion of someone's portfolio. Why is it called fixed income?

Well, it's called fixed income because a bond will give you a known stream of payments, like a principal plus interest. So if I hold a bond with a five-year coupon, that means every year I get a 5% interest payment on the face value of the bond. That's as opposed to an equity where you don't know exactly how much you're going to get. The dividends may go up, they may go down, and so that would not be a fixed income stream. Okay, so that five-year coupon, for example, does that mean that it's –

Does the 5% match the five-year or does that – can that – is it more than five years? Maybe you just used two numbers that are the same and I got confused. Yeah. I think the five is a coincidence. The 5% coupon means that if I have a $100 bond, if I'm holding a $100 bond from the treasury – well, the treasury doesn't really issue $100 bonds. It's more like in the hundreds of thousands. But if I had a $100 bond,

dollar bond every year, I would get a payment of 5% or $5. And that bond, what you're referring to, the other number you're referring to is the maturity.

So some treasury securities, some treasury debt pays off after like three months, very short term. Other treasury debt is longer term, 10-year, and there are even some 30-year bonds. The one that markets tend to focus on primarily for the long-term interest rate would be the 10-year bond interest rate or bond yield. Or the 10-year T-note as I like – as I hear the business community calls it. OK. So –

So then are you supposed to get the same sort of obviously the principal back, but the same amount of interest back for across those 10 years?

Yeah, well, the coupon payment is the same for every year, and then you get the face value of the bond back. So in the example I gave you, you get the $100 back at the end of the maturity of the bond. The thing is, the price of the bond can vary. So suppose I lent you, Meghna, suppose I lent you $1,000 and you agreed to give me a 5% interest payment every year. That would be fine when the prevailing level of interest rates were 5%.

Now, suppose the alternative interest rate so I could get on my money went up to 10%. Now, I'd be kicking myself because like, hey, why did I lend money to Magna for 5%? And when I could have gotten 10% up, I just held off. So if I were to try to sell that 5% Magna bond to somebody else, they'd go like, no, I'm not going to buy that bond for the face value. I'm going to require, I'm only going to buy it if you sell it at a discount.

So I would lose money on that transaction as interest rates spiked. And so that's the basic principle of bond pricing is that when interest rates go up, the prices of bonds go down because now investors are less willing to spend the same amount or less willing to spend money for that same 5% income stream. I see. Okay. So the last part is really important to understand. So the actual value of the bond goes down.

because of the fact that investors get less money back on those interest payments. Exactly. Investors are less willing to pay for that same constant income stream when interest rates are going up. Okay. And is this what's called the yield?

Yes, exactly. When we talk about bond yields, that's sort of synonymous with the interest rate. Well, actually, I should footnote that. There's the coupon rate. Now we're getting into the weeds. The coupon rate is that 5% a year you're getting on the face value of the bond. But the yield is the return you get taking into account the potential change in the price of the bond from one year to the next or even one minute to the next. Okay. So...

Thank you for that 101. You're welcome. It's funny because like like theoretically, I've always found bonds to be kind of they're supposed to be simple to understand. Right. It's that like interest goes up, price goes down relationship and vice versa.

However, the bond market overall seemed to me to be exceedingly complicated. Yeah, no, it's funny. It's exceedingly complicated, or it appears that way, even though the structure of bond is very simple. Pricing of the bonds and trying to anticipate future interest rates and how that affects the prices and the volatilities, how they enter into it.

That's why Wall Street employs a lot of so-called rocket scientists to try to nail bond pricing. It can get pretty complicated even though the instrument as such is relatively simple. Got it. OK. So let's step back and do some big picture now, Professor Kuttner.

Why would a president who has a certain economic agenda, whether it be President Trump or any other, why would this person care about how the bond market is doing?

Well, the reason a rational individual would care about the – leaving aside the government, the rational individual would care about the 10-year yield is because it reflects a lot of the costs of borrowing for other people in the economy are tied to the 10-year bond. So, for example, mortgage rates, your mortgage rate if you bought a house would be – pretty closely tracks the interest rate on 10-year treasuries.

Similarly, the interest rate corporations pay on their debt is also pretty tightly linked to the 10-year treasury. So it would be in the interest of the president or whoever, if he wanted to – or he or she wanted to stimulate the economy, is to try to get the 10-year yield down as that would lower borrowing costs for homeowners and lower borrowing costs for corporations. OK. So you want to get that yield down. But from what I understand –

In the first, you know, six weeks of this year, maybe the first couple of months, that Treasury bond yield has been going up? Yeah, well, it went up and then in the past couple of months it's gone down again. It's gone down. So it's a bit of a roller coaster since the election. Okay. So what does that mean?

Well, let's see. So a bond – increase in the bond yield or bond interest rate can be either good news or bad news. And by the same token, a decline can either be good news or bad news. It depends on what is causing it. So bond yields, bond interest rates would tend to rise for a good reason if investors thought the economy was perking up and behaving strongly.

In that case, they would expect the Federal Reserve to be raising interest rates in the future, and that would be – which they would typically do in a sign of economic strength. OK. So then we've got about 30 seconds before our first break. Just why would people be saying that the bond market may be the most powerful check on Trump's economic agenda? Or as you'll recall – you recall that a number of years ago, it was –

James Carville said he wanted to come back as the bond market because that way he could intimidate everybody. So the concern is that if the government started running very large deficits, the government would have to pay a higher interest rate on bonds to entice investors to hold those bonds. Okay. You know what? Sort of the supply and demand thing. Right. Supply and demand. We're going to come back and I'm going to get you to clarify on that a little bit, Professor Kuttner. So hang on for a second. This is on point.

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Institutional investors account for roughly 80% of holdings in the U.S. stock market. So how do they influence executive compensation? It's almost like they're policymakers deciding how something is done across the economy. It's almost as influential as regulators, it sounds like.

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You're back with On Point. I'm Meghna Chakrabarty. And today we're talking about the bond markets and specifically U.S. Treasuries and why they may be, according to some, a very powerful check or pushback on President Donald Trump's economic policy.

And I'm joined today by Ken Kuttner. He's a professor of economics at Williams College and former research economist at the U.S. Federal Reserve. And Professor Kuttner, you mentioned James Carville, of course, the Democratic longtime Democratic operative and how he once famously quipped that when he dies, he wants to be reincarnated as the bond market.

He's been talking about the bond market more recently and a lot. And he's been saying you can intimidate everybody if you're the bond market. That's actually what he said about his reincarnation desires. But just last week, he was on News Nation and he said the bond markets do not appear to be buying what the GOP and Elon Musk's doge represent.

regarding cutting costs and the deficit, what they're selling. You know, you can come up with every fake number you want, but you can't fool the bond market. These people are not foolable. They're not going to believe any of that. I promise you. Okay. So, Professor Kuttner, you know, I have this terrible habit that the entire On Point staff hates, which is asking a really big question with 40 seconds left in a segment.

So I'm going to apologize for that and let you answer it again because I heard you there and I didn't quite get what you were trying to say, which is why would the bond market – and we'll stay focused on that 10-year T-note, for example. Would the behavior of the bond market be a check on a president's agenda? Yeah.

Exactly. So what Carville was referring to is the possibility that misguided or stupid government policy might lead to a spike in bond yields. And that could happen for one of three reasons. And one reason, as I mentioned just before the break, is if there's a big increase in the federal budget deficit.

That would mean that there's going to be more bonds being issued. And even though the treasury bonds are a great investment, at some point you have to start offering bond investors a sweeter yield, a higher yield, in order to get them to hold that increased supply of bonds.

So just as a matter of supply and demand, that's going to drive up the bond yield or drive down the price. And so that's the thing that we worry – one of the things we worry about in the current context –

You know, we have these very large tax cuts coming down the pike. And as you mentioned, the Doge spending cuts are not going to come anywhere close to offsetting the kinds of tax cuts that are potentially in the works. OK. And so if the Treasury – if the bonds have to produce a higher yield then, does that mean that ultimately the Treasury has to spend more money?

It means ultimately the treasury is going to spend more money. That's right. Debt service is going to go up and the cost of borrowing for everybody are going to go up along with that. OK, so thank you for that clarity, because that's actually a question I've always had. It's like, why is why is sensitivity of the bond market so important? But now now you clarified it's basically like debt service is going to go up.

And I should add on to that. There are a couple of other reasons too. So if there are concerns that the government is simply going to be unable to service the debt or the president and Congress are going to be unable to get their act together to raise the debt ceiling –

you might see a partial default on the debt. There might be a period of time when the Treasury simply can't make the interest payments on the debt. And there have been lots of instances in the relatively recent past when the bond market has gotten skittish

about the inability to reach an agreement to raise the debt limit. And we've had some close calls. We haven't had any big bond sell-offs around those episodes, but a lot of bond market nervousness, which when the bond market gets nervous, honestly, I get nervous too. Oh, okay.

You know, I'm going to bring in another guest here in a second, Professor Kuttner, but I got to ask you in the course of our conversation thus far, you've used words like stupid in describing economic policies and rational or irrational. Are you signaling something here?

Well, you know, there are a lot of things that any administration can do that would really just be an own goal and really mess things up. So, for instance, failing to raise the debt ceiling would be one of those things. Completely irrational. It would be shooting itself in the foot, if I can throw in another metaphor in the –

In the very next sentence. And so the main thing that a government really needs to do is to avoid making mistakes, is just simply do no harm. And one is worried that this is an administration that would ignore that do no harm dictum. Okay.

Well, let's hear from a voice in the administration. This is a little tape from Treasury Secretary Scott Bessent, who told Bloomberg just last month that the Trump administration is focused on U.S. 10-year T-note yields.

We are not focused on whether the Fed is going to cut, not cut. What we are focused on is lowering rates. So we are less focused on the specific rate cuts and how do we get the whole curve down. I mentioned that the 10-year, I believe, is...

the important price to focus on. It's mortgages, it's long-term capital formation. And look, I think with the president's policies of energy dominance, deregulation, and non-inflationary growth, I think that the 10-year is going to naturally come down. And then, look, on top of it, what if we do get some big savings on the spending side from the Doge programs?

What if? We'll have to see. But last week, the secretary was also on Bloomberg TV, and he was asked what he thought about consumer sentiment reports showing that Americans are anticipating more inflation. I'm not going to question the American people's current conditions because we're still living through this Bidenflation. I think that over the next six and 12 months, that as we

deregulate, drill more American energy and establish our energy program and then make the 2017 Tax Cuts and Job Act permanent, get some certainty that I think that

we could very quickly go back to the Federal Reserve target of 2.0%. Okay, that's the U.S. Treasury Secretary Scott Besant. Joining us now is Matt Egan. He's a portfolio manager and head of the full discretion team at the investment management firm Loomis Sales & Company. Matt, welcome to On Point. Hi, Meghna. So what are you watching across the economy or what are bond traders in general watching right now?

Right. For a long time now, we've been focused on the deficit. And I think it is the Achilles heel of Trump, the Trump administration, or for that matter, any president that be in this situation right now. I heard a conversation you were having with Professor Kuttner, and I would bring one example where a bond market took down a government, and that was Liz Truss, Prime Minister of the United Kingdom, not just, I don't know, two years ago or so. So it is a powerful force. And

And it's a structural factor, right? So it's a structural deficit that doesn't ebb and flow with the economic cycle. And that's a problem that has a lot to do with demographics, entitlement, the security concerns from a geopolitical perspective that is leading to a lot of...

non-discretionary spending, very difficult to take, to really deal with. And here's the key thing. If taxpayers don't want to pay higher taxes to address the deficit,

And the government doesn't want to rein it in. There's another form of tax, and that's called inflation. And it's kind of running. It's all has been called the thief in the night. And it's sort of like when you're your doctor says, you know, all your vital, you know, you've done you've gone to your checkup and your doctor said, hmm, you got a lot of issues here. Your blood pressure's up, you know, looking at this figure, this figure, you got to get on the treadmill, you got to start eating better.

And, you know, if you don't, at some point in the future, you could run into trouble and you'd be like, well, when's that going to be? We don't necessarily know when, but I know Ray Dalia was talking about the heart attack could come. And that's what I think we're facing here. And it comes at a time where I think inflation is in the system.

And it's not something, and I know we've experienced sort of a spike in inflation recently, but in terms of investors from a longer perspective, there are very few investors or really people in the economy that have experienced a more sustainable inflationary type economy. Hmm.

Okay. So I want to just go back to the UK example that you gave, Matt, about former Prime Minister Liz Truss, who famously there was a long-running media joke about will her prime ministership last as long as this head of lettuce?

Because they put up like a head of lettuce and said, you know, will it wilt before Truss's prime head of UK government time ends? But to be clear, it was her plan. And correct me if I'm wrong. She had a plan to institute some, what, 45, something like 45 billion pounds worth of unfunded tax cuts. And that's what led to this market panic. Right. Right. And bonds spiked. Right.

And it caused upheaval in the financial markets to relatively – enough to get the central bank of – the Bank of England, the central bank there to come in and try to smooth things over.

And, you know, with the spike in rates, your popularity declined and she was carried out in a stretcher. Okay. Well, Ken Cutler, let me turn to you because it is a cautionary tale. But on the other hand, the UK, all due respect to our, well, I guess there's...

I'm still going to say that across the pond. They don't have the it's not the U.S. economy. Right. It doesn't serve as the same sort of global currency reserve or major keystone in international trade. So is it, you know, an actual appropriate cautionary tale for the U.S.?

Well, I'm glad Matt mentioned that. That had occurred to me as well, the trust debacle. And I think, Matt, I think in one day, the guilt yield went up by about 50 basis points and maybe even more.

But you posed a good question, Meghna, which is that the UK gilt market, yeah, very important for the UK, but not nearly as embedded in the global financial system as the US Treasuries. Matt is the markets guy and I'm not, I'm just a professor, but my impression is that the case of the US Treasuries is that there's really nowhere for loved investors to go. Really, the Treasury bill market is just such a, it's like the lifeblood of so many of these markets.

that if they wanted to get rid of their treasury bills, where would they put the money? I'm not clear what the alternatives are. Matt, go ahead.

Well, that is true. And so for what we're getting at here is the dollar is king. It's the reserve currency of the world, and it's not likely to lose that crown anytime soon. You know, the policies that are being thrown about, you know, and not just in this administration, but the previous administration, you know, kind of chip away at that reserve currency status potentially, right?

But, you know, it's something that, you know, shouldn't be taken for granted. And over, you know, it's sort of like when you like going back to the United Kingdom, when you see, you know, they used to be a long time ago, the reserve currency of the world. And it lasts and lasts and lasts until all of a sudden it doesn't. And so you just have to have to be careful about it. We as a reserve currency, we should run deficits. There's nothing wrong with that.

per se. It's just too much of something. And I wanted to get back to the Besson comments because I think he's right to focus on the areas that he's focusing on. His 3-3-3 policy, 3% GDP growth, 3% deficit policy.

and 3 million barrels are, you know, aspiration and they're signaling. And I think it reflects that the administration or parts of the administration knows the vulnerabilities they have to the deficit and would like to place the focus on getting longer rates down and maybe move away from battling directly with the Federal Reserve, which I, you know, I think a lot of people in the bond market worry about the independence of the Fed and how Trump's

Trump and Powell may be ending up on a collision course on this. I'm Meghna Chakrabarty. This is On Point. Matt, just one quick clarification about the 3-3-3 concept. The 3% just refers to getting the deficit down to 3% of GDP? Right. Okay. And right now, you also mentioned Ray Dalio, the billionaire hedge fund manager, saying that he worries that the U.S. is on the brink of experiencing an economic harddown.

heart attack. And he was saying that specifically because the deficit is now 7.5% of GDP. Does that number make sense to you, Matt? Six or seven, yeah. Six or seven. Depending on how you're calculating, yeah. Okay. Well, so then, I mean, if deficits are one major, major aspect of what's worrying bond markets...

We have to ask if there's any kind of sense on the horizon here, because just a couple of days ago, the Republican-controlled House passed a budget resolution that authorizes $4.5 trillion in tax cuts through 2034. It's an extension of the 2017 tax cuts that were passed under the first Trump administration.

Now, they say that in order to help pay for that, they're going to ask the administration to find $2 trillion in spending cuts. But according to a lot of independent analysis, that House budget and extending the 2017 tax cuts is going to increase the deficit.

By what, $3 trillion through 2034? Matt, your thoughts? Yeah, these are the contradictory policies that the Trump administration is throwing out there. On the one hand, you've got the chainsaw, Musk coming in and trying to, through Doge, cut expenses.

in the government. On the other hand, this kind of policy, like you mentioned, the tax and spending bill is going to supposedly add something like $2.5 trillion to the budget deficit with a lot of erosive assumptions about growth and rates that go with it. We've got the immigration policy and then tariffs themselves. So all of these policies are in some ways contradicting that goal that Besant laid out about a 3% deficit deficit

Ken, do you have some thoughts on that? Yeah, I totally agree with Matt. It's deeply, deeply contradictory and reminds me of back in the day. I'm willing to remember the I think was under Reagan. They had the so-called rosy scenario in which the deficit was projected to come down despite similarly contradictory policies.

And I think they might be relying, if they even come out and said it, relying on a very rosy scenario of 3% growth is one way to reduce the deficit to GDP ratio is to increase the denominator. And I think the

Besant must be placing a lot of weight, maybe I think a lot of his wishful thinking on the idea that drilling more oil and deregulating is going to get GDP growth up from sort of the consensus range of maybe 2% to something like 3%. And I think that's unrealistic. Well, taking us back to tariffs, though, I mean, that's one thing that President Trump has said.

that there may be, I don't think he even admits to any short-term pain for U.S. consumers, but even if there is, the idea is that it's going to bring a lot of production back domestically, and that would help grow the economy in the long run. So calm down, bond markets. We've got you over the next 10 years. I mean, what do you think?

Well, that's true. But on the other hand, trade has proven to be a real boon for the economy, the kind of trade we have in Mexico and Canada. So, for example, the U.S. industry benefits greatly from assembly and parts manufacturing in Canada. And so even though in theory that should bring some production back, it's also going to cripple a lot of industries that depend on trade with Canada and Mexico for their intermediate goods and for the raw materials.

So I'm skeptical of that claim. Well, Professor Ken Kuttner and Matt Egan, stand by for just a moment. We've got a lot more to talk about regarding the bond markets and how they may be a check on President Donald Trump's economic agenda. So hang with us. This is On Point. I can say to my new Samsung Galaxy S25 Ultra, hey, find a keto-friendly restaurant nearby and text it to Beth and Steve. And it does without me lifting a finger. So I can get in more squats anywhere I can. One. Two.

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You're back with On Point. I'm Meghna Chakrabarty. And today we are talking about why the bond market could be a very potent check on President Donald Trump's economic agenda. And I'm joined today by Ken Kuttner. He's a professor of economics at Williams College and former research economist at the U.S. Federal Reserve. And Matt Egan is with us as well. He's portfolio manager and head of the full discretion team at the investment management firm Loomis Sales & Company.

And over the course of this conversation, you've heard both gentlemen point to the fact that bond markets are highly, highly sensitive to rapid rises in the U.S. deficit. So in order to calm bond markets down and pull that yield curve down, as we were hearing about earlier, one thing, don't make the deficit go up. Maybe ideally even start bringing it down, as Donald Trump and Elon Musk, et cetera, have talked about doing.

Well, there is a time in U.S. history where that happened. It happened under Democratic President Bill Clinton. And on February 17th, 1993, President Clinton talked about it in his first address to a joint session of Congress. I well remember 12 years ago, President Reagan stood at this very podium and told you and the American people that if our national debt were stacked in thousand dollar bills, the stack would reach 67 miles into space.

Well, today, that stack would reach 267 miles. Low Earth orbit. In that same speech, Clinton unveiled his new economic plan. In order to accomplish both increased investment and deficit reduction, something no American government has ever been called upon to do at the same time before.

spending must be cut and taxes must be raised. So Clinton there was talking about a system of tax increases and spending cuts, as you heard, aimed at reducing the federal deficit by 38 percent over four years. We in the Clinton administration, led by the president, were hell-bent on reducing the budget deficit. The

The political opinion at the time on the Democratic and Republican side thought that the deficit was too large and it was important to bring it down. This is Alan Blinder. He was one of Bill Clinton's closest economic advisors at the time, and he later served as vice chair of the Federal Reserve. He's now a professor of economics and public affairs at Princeton University. Blinder says President Clinton had campaigned on a middle class tax cut, but the economy had other ideas.

Low taxes and high defense spending in the decade before Clinton took office, a.k.a. the Reagan years, had played a part in the national debt doubling as a share of economic output. Clinton realized that he was not going to be able to pull two rabbits out of the same hat. That is the middle class tax cut and a big deficit reduction. He opted for the big deficit reduction. There was one big group Clinton's team had in mind with this plan. And Blinder says...

bond traders. The hope is that would make the bond traders happy and they would bid up bond prices, meaning bid down interest rates. And that would help the policy work.

Because when you, the things you do to reduce the deficit, take demand out of the economy and other things equal, slow it down, you'd like something to put it back. And that's something in the case of the Clinton deficit reduction program was a bond market rally that lowered interest rates. By the end of President Clinton's first term, the overall deficit had been slashed to 1.3% of GDP. And by 1998, 10-year Treasury yields were at roughly 4%.

Fast forward to the present day, and as we've been talking about, the U.S. deficit is ever-growing. Elon Musk's Doge team claims it can slash at least $1 trillion from the federal budget. Meanwhile, President Trump is pushing to extend the 2017 tax cuts. We touched on that before. Alan Blinder says he wonders whether the so-called bond vigilantes will return.

In the Clinton years, the expenditure cuts were going hand in glove with tax increases to lower the budget deficit. Now, the proposed expenditure cuts are going hand in hand with tax cuts.

which doesn't leave you any deficit reduction and probably leaves you an increase in the deficit. In fact, Alan Blinder worries that the bond market may not be sufficiently anxious right now. I don't think they're nervous enough. Bond traders often care about their own marginal tax rate more than anything else. And they're in line for a personal tax cut. Never mind their businesses.

Their own personal tax returns. That's Alan Blinder, former vice chair of the Federal Reserve. He also served on President Bill Clinton's Council of Economic Advisors in 1993 and 1994. He's currently at Princeton University. OK, Matt Egan, that last thing that Blinder said about, you know, forget how markets are actually behaving. Bond traders actually care about their own personal marginal tax rate. What do you think?

Well, it's true. And, you know, I think obviously gets right to the crux of the problem here. Again, it comes back to this notion. Are we going to eat our vegetables, you know, and take care of ourselves from a budget perspective and to try to get rates down? Now, Clinton, you know, had the benefit of living in a completely different background. You know, we had won the Cold War, you know, and spending was coming down and so on. So all of the everything was lined up in a neat way to kind of pull this off.

We don't see that in today's government, certainly in Congress. And, you know, we talked about the tax and spending bill. So you've got to fund that deficit somehow. And a lot of people don't know, we were talking earlier about, you

issuance of treasuries. Well, every month there are issuers issue, there are auctions for treasuries. They're well telegraphed. There are set amounts that come in from T-bills to two-year note, three-year all the way out to 30-year notes.

And we should pay attention to these because what the Fed would worry about and the Treasury would worry about is having really bad auctions, you know, where not enough people step up to the plate to buy those treasuries, what Professor Kuttner was talking about in terms of the supply demand. And so more and more treasuries has the effect of raising the real yield, the cost of borrowing

uh, for the government, that interest cost now is more than our defense spending, right? That bill now is, is rising. Um,

And so the government, the administration understands this. The problem is in order to really, really tackle it, you have to do one of two things. You have to really cut spending or you have to raise taxes. The spending cuts by themselves are probably not going to be sufficient to really rein in the deficit, although it could provide a reprieve for, you know, it could extend the runway, but

But without addressing those entitlement and who wants to touch entitlement? It's sort of third rail, right? And so let's say they're really adamant about cutting the deficit and through spending cuts. And let's say that they are effective in that. My view on that is that's going to be pretty painful on the American public.

And two years from now, there's going to be the midterm elections, and that will be a difficult position for the Republicans to go into that election with a weak economy and potentially with other policies still elevated inflation. Okay. So Professor Kuttner, let me pick up on that because, again, just to put my highlighter over what Matt mentioned, if you're really serious about cutting the deficit –

It's gotten into the tune of trillions of dollars, as Elon Musk keeps saying he's going to do someday. Really, you're going to have to either go into Social Security, Medicaid or Medicare or the defense budget. And all three of them.

with the exception of four of them, because I want to put Medicaid and Medicare separately, are basically sacred cows, right, in American politics for understandable reasons. Medicaid is coming under the, you know, into the sights of Congress. I can see that. But let's, you know, are they going to achieve $2 trillion in tax cuts? Doubtful. So are...

Republicans, is the president, are the GOP and Congress essentially living in la-la land about what they, frankly, what they hope to achieve? Or can we somehow spark this like massive burst of economic growth with the 333 plan, as Matt said?

Well, the short answer to that last question you posed is pretty surely no. I have to say, listening to the clips of Clinton, I mean, there's like warm feeling of nostalgia for the good old days when policymakers could actually have a rational and balanced discussion of things like this.

And you wouldn't simply be taken out and shot at the first mention of, um, of tax increases. So I had, uh, we, we forget that that was even a possibility 30 years ago. Uh, clearly the way things are now, we're never going to have tax increases put on the table. That is completely taboo. Um, the Republicans used to be, maybe until Reagan used to be the party of fiscal probity, no longer the case. Um,

They control all levers of the government and have no interest in increasing taxes for anybody, particularly the high earners.

So that's not going to happen. As you point out, the government budget now is pretty much all entitlements, defense, and debt service. So there's really no room to cut. So unless you have tax increases on the table, there's not much that's going to happen. Okay. So let me actually push back against my own question and get your response to this. Because I'm thinking back to that Liz Trust example that Matt brought up. It is very instructive because in that case, the markets did respond.

But in the United States, let's look at under the Reagan administration or even 2017 when the Trump tax cuts were passed. We had an increase in major increase in deficit in both of those moments in U.S. political history. But and please correct me if I'm wrong. I don't recall a massive bond market freak out.

Oh, go ahead. I'm sorry. No, you go ahead, Ken. So maybe all this worry about the bond markets is totally misplaced.

Well, you know, I agree with Alan Blinder that I'm a little nervous that the bond market isn't more nervous than it is. I should say that the one thing we have going for us, excuse me, that we didn't have going for us in the 1980s or much less in the 1970s was the Federal Reserve has been, has done a, I think there's a lot of confidence in the Federal Reserve to get the inflation rate back down to the 2%.

Maybe not as quickly as people would like but eventually after a year or two, I think there's a lot of confidence that Fed will get things back down to 2%. That wasn't always the case. And so I think one of the reasons the bond market has not been freaking out is because they think, well, okay, so maybe real interest rates are going to be higher. The government is going to be in a sticky spot but the Fed is going to – the Fed is on the case.

And this is why continued independence of the Fed, to circle back to something you said earlier, is really key. If that started to get undermined and if the Trump administration were able to start pressuring the Fed to relax a little bit on keeping inflation down, then you would see a bond market freakout guaranteed. OK. So, Matt, let me get the same –

turn the same question to you, but I want to put some numbers on it. I'm looking here for an analysis from the Committee for a Responsible Federal Budget. And they say in Donald Trump's first full term in office, he approved $8.4 trillion of new 10-year borrowing and or $4.8 trillion. That's probably a better number, excluding the CARES Act and COVID relief. OK, so $4.8 trillion, excluding COVID related stuff.

And they also only achieved $443 billion in deficit reduction during that term. So, again, using those numbers as our baseline, there wasn't, again, a bond market freakout in the first Trump administration. So I really want to push this. Like, are we worrying too much about what the bond market thinks this time if the national debt or deficit continues to rise? Yeah.

Well, there wasn't a bond market sell-off. In fact, back then, I think people were more worried about growth and inflation remaining too low. And that's flipped on its head now with inflation in the system. But I would go a little bit ahead of time in 2023. And that was a period when the Fed was still in a tightening path.

And rates were, you know, in the short end, the policy rate, the Fed funds rate was up over 5, well, 5.5 to be exact, 5.5%. But again, these auctions were coming to market. And because of the spending they did during the pandemic and so on, they were pushing the Treasury issuance into the so-called coupon part of the curve, meaning two-year, three-year, which all have fixed coupons versus, say, the very short end of the curve, which are T-bills.

And what happened over time is those auction sizes grew pretty significantly. And there was a sort of a mini riot in the fall of 2023 where the 30-year, remember, spiked over 5%, the 10-year broached 5%.

And the Fed and the Treasury sort of looked at that because when you looked at the individual auctions, they were very sloppy. What I mean by that is the market, the Treasury market, the Treasury will always clear the market. Right. The question is, what is the yield to get everybody to pony up the money to clear it?

And so when they saw that, guess what happened? The Fed pivoted to an easy bias. They didn't start cutting rates for a lot longer, but they pivoted, said we're basically holding flat here. And then secondarily, this is really important, the Treasury Department pivoted.

gives the market an idea what the budget requirements are going to be and how they're going to borrow in the future. And what they announced at that time is that they would not push any new issuance into the coupon curve. They would keep it all in the short end of the curve. And that continues. Investment is continuing that. So now T-bills represented...

uh under 20 percent of our debt now is going to end the year closer at 30 percent okay so what i hear you partially saying is that there was a response right partially in in a sense from from the fed being a major uh uh group that that did respond so professor kuttner we've only got a minute left here and i want to bring this back to the level of you know our individual listeners

Why should they continue to care about how the bond market responds to President Trump's economic agenda? Well, why should they continue to care? Well, again, it comes back to the issue of how this hits the normal people in their pocketbook. And this is the one thing that people are going to notice probably more than anything else is going to be.

How much is it going to cost to buy a house? We've already seen as rates went up over the past year or two, that's been not good for the housing market at all. We've seen new home sales tank. We've seen home building decline.

So, this is something that's really going to have a direct impact on the economy that people will notice. They maybe don't care so much about the gyrations of the bond market, but they will feel it eventually and it will come home to roost. Right. Well, what I'm hearing from both of you though is that if the bond market does start sending more alarm signals out, then a response of some kind is going to come from somewhere, if not from Congress or the president, maybe the Fed.

Really, really fascinating hour. And I want to thank both of you. Ken Kuttner, professor of economics at Williams College and Matt Egan at Loomis Sales and Company. Thank you both so much. I'm Meghna Chakrabarty. This is On Point.

Support for this podcast comes from Is Business Broken? A podcast from Boston University Questrom School of Business. A recent episode looks into how shareholders, including institutional investors, influence executive pay. Listen on for a preview. Here's guest Bob McCormick. The main point is compensation can be very complicated. However, it's also very transparent because you can see the numbers. And then what most investors really start with is,

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