Does the Bond Market Have It In for Donald Trump?
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I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this week we're asking, does the bond market have it in for Donald Trump? And if so, should he care? With me, Anna Wong, Chief US Economist at Bloomberg Economics. She's worked at the Fed and served in the Trump White House in 2019 and 2020 on secondment at the Council of Economic Advisers. Hello, Anna. Hi, Stephanie. Hi.

And Kate Davidson, managing editor who covers US economic policy for Bloomberg News in Washington, DC. Thanks for joining us, Kate. Hi, Stephanie. The rest of you listening may be just getting settled into 2025, but the bond market investors of the world have been extremely busy since the start of the year. The bond market story is front and centre. Is this sell-off just getting going if yields continue to rise? Pushing up the cost of government borrowing, especially in the US, but also around the world.

The market is telling you you're at some level here where you're really pushing your luck on what level do 10-year yields or do rates really begin to hit the economy. I think that's the question. The yield on a US 10-year treasury bond, roughly what it costs Uncle Sam to borrow for 10 years, has risen more than one percentage point since September and could now, with what's happened in the last few weeks, be heading for 5%. Now, that may not sound like much, but we haven't seen long-term rates that high in nearly 20 years.

Of course, everyone on planet Bloomberg cares a lot about all aspects of this and is constantly writing about it in the last few days. But I think the big question for this podcast is whether the incoming Trump administration should be worried about what's been happening in the bond markets. And specifically, does it put at risk any of Donald Trump's grand plans, whether for immigration, trade wars or tax cuts?

Welcome to Trumponomics, the Bloomberg podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy and what on earth is going to happen next.

Anna, I mean, we've got quite a lot to cover, but I guess first we should spend a little bit of time on why you think bond yields, the cost of borrowing has gone up so sharply in the last few weeks. Why are they selling bonds? Right. The answer to that question will crucially get to the core of your original question, which is will it restrain the Trump administration, right? So I've heard at least five different explanations for why pensions

10-year yields have risen by 100 basis points, even though the Fed has cut by over 100 basis points. These explanations range from

Well, it's because the Fed has lost credibility that they should not have cut by so much in the first place. And market is signaling that they don't believe they have attained inflation. I've also heard maybe because investors have lost confidence over the fiscal sustainability. I've also heard maybe it's Trump.

policies potentially being inflationary, the tariffs and the deportation. Finally, another explanation I've heard is maybe it's because China or other foreign central banks have been dumping US treasuries as they are defending their currencies. So out of all these explanations, personally, what I've found is

most convincing is that it's a combination of a resetting of expectation of Fed rate cuts due to better economic growth prospects, as well as an increase in real rates. Just to sort of spell that out a bit, I mean, coming into this year, or at least maybe when everyone went on their holidays, we were thinking we get some

interest rate cuts and maybe lower mortgages from the Fed. They're getting control of inflation. And for a mixture of reasons, people in the markets have reassessed that view in the last week or two. And if you're Donald Trump, you'd say, well, because I won the election, everyone's super optimistic about the US economy. So maybe it doesn't need...

so many interest rate cuts because it's not in trouble. In fact, it's doing well. I guess that would be the positive spin that he might have on it if he spent his time thinking about interest rate expectations.

If he truly thinks that way, then he wouldn't be trying to talk down interest rates either. So clearly he's worried. And I do think he has some reasons to worry because, as I said, the repricing of the 10-year yield started in September. But a lot of that action also happened after the December FOMC meeting. And in that meeting, the Fed shirked.

sharply increase their inflation outlook in 2025 on expectations of Trump policies, terrorist policies, deportations, so the minutes suggest. So if that's the case, then from the Fed's perspective, the reason why they are not planning to cut as much in 2025 partly has to do with Trump policies.

policies that has not happened yet. And that is already all baked into 10-year yields and serving as a restraint to the economy, right? So it's all basically acting as a restrictive force to the economy before those policies come in place. Kate, you have a team of people under you that's sort of looking at the real economy and also looking at the Fed. But just from your perspective, sitting in DC, is it kind of

registering this change in bond yields sort of inside the beltway with people thinking politically about the incoming administration and how incoming members of the administration, whether it's the new treasury sector or others, are thinking about the world? Do you think this kind of registers or is it not something they really care about?

I think it's slowly starting to. And I think where we will be looking for it and listening for it first is among the members of Congress who tend to be more worried about deficit spending, the deficit and debt hawks. There's not as many of them as there used to be, clearly.

But there are still a few. And remember, Republicans will be in control of the House, the Senate and the White House. And so they can do a lot, but their majorities are not very large. And so all it takes is for a few concerned people to sort of throw a wrench into the process here. And if they are starting to be worried, if they're hearing from constituents, if they're hearing from builders, if they're hearing from

regular voters hearing about interest rates, hearing about people concerned about inflation being stickier and all of that kind of being reflected to a certain extent in higher yields. I think that that could raise some worries and is maybe starting to a little bit about how much more deficit spending they can do in the form of, you know, deficit finance tax cuts or other things. Yes, because to your point, I mean, the reason it matters is if you've got this, this is about the cost of borrowing for government. So if it's gone up,

it's potentially not just now, but into the future, the cost of doing things, the cost of expanding a deficit gets that much higher. You're going to be spending that much year upon year on the debt. Already, I think the debt service costs are bigger than the defence budget, which has raised some eyebrows of those who want to make sure that the US continues to be a great power. But you don't get the sense that

Donald Trump or the people close to him are focused on the bond market as much as the stock market. Would it take a stock market decline to really change the way he's thinking about the markets and the economy?

Perhaps for Donald Trump, right? We know he cares very much about the stock market, but certainly his Treasury Secretary Scott Besson is very much aware of what's happening in the bond market. He's made some comments the past few months about how Treasury Secretary Janet Yellen has been managing the debt. And I would certainly expect that he will talk about this at his confirmation hearing in the Senate that's coming up soon. He'll be asked about it. But right, I would think that the

You know, yields, tenure yields eclipsing that very significant, even if it's just psychologically significant, 5% threshold would get a lot more attention in Washington.

And it's worth saying the rally in the stock market that we've seen since Donald Trump was elected has been more or less wiped out by the stock market reacting in the last few days to the rising interest rates. Because if you think about it, the rising cost of borrowing also means you can earn more on a bond, which means that it's less attractive to hold a stock is one way of thinking about it. So we have already seen a response on the stock market

What is interesting about this happening now, right, is that we haven't actually seen a lot of the incoming Trump's administration's policies coming in. And most of them will add to growth. And if anything, put the Fed in a position of maybe having to raise interest rates. Is that something that you think could happen in the next year if you have tariffs changed?

potentially adding to inflation, a big tax cut package or a package that makes permanent the tax cuts from the previous Trump administration, surely that could send yields even higher. Yeah. So the tariffs, if Trump was serious about imposing a universal tariff, a 20% universal tariff, for example,

could raise the core PCE by one percentage point, then it's possible that we will see a rate hike at the end of 2025 or early 2026. But do you think there would be any voices in the White House saying, you know what, we don't want a bond market meltdown or people to start really questioning...

US debt or demanding, you know, ever higher cost to borrow? Do you think that it could potentially be a restraining force on any of the sort of big priorities that Donald Trump has coming into this administration? So if there is two people who will be those voices, it would be Scott Besant and Kevin Hassett. And just remind us what jobs they're going to have in the next administration.

Scott Bestin would be the US Treasury Secretary and Kevin Hassett would be the NEC Director. And their influence on Trump to a large extent depends on their personal relationship with

with Trump. And both of them had been known as not friendly to terror. I mean, they were basically in their core free traders. If you look at the stuff they wrote years before they joined the Trump administration. And, you know, recall a couple of weeks ago, in fact, I think it was just last week, there was a leak in Washington Post

suggesting that some people in Trump orbit are proposing a more targeted approach

tariffs. And to the extent that those are leaked by people in Scott Besant's camp, and now this gets into palace intrigue, right? Then it could be hurting the relationship of Scott Besant and Trump because the folks around Trump, especially characters like Peter Navarro, who's playing a pretty important role as a shadowy person around Trump,

Leaks actually throws distrust within the inner circle, and they're not supposed to leak. And the fact that that story in Washington Post came out suggests that it's hurting the internal trust, and I think it could take a toll on the personal relationship between people like Howard Ludnick and Scott Besson with Trump if that continues.

Kate, we should probably spend a minute on that, although it's not directly on the bond market thing. It does go to the sort of expectations around economic policy and the thing we've tended to focus a lot on, which was the desire to put or the promise to put tariffs on most imports coming into the US. You know, we did see last week that

a lot of back and forth and a sort of outbreak of different views on where the tariff policy is going. We had that Washington Post story that Anna just mentioned, but then quite a lot of pushback from people closer to Trump on whether or not they would be targeted, those tariffs, or whether actually it would be closer to what he said on the campaign trail. I mean, we thought it was going to be terribly disciplined, but already there's a lot of debates breaking out into the public.

I think we learned a lot in the first Trump term about how the Trump White House operates. And for sure, I think there are indications it will be different. It won't be exactly the same. And as you mentioned, Stephanie, right, some sense that things are a bit more organized now. You have different people running things. But

At the core, Trump, you know, he has people with a lot of different viewpoints, as you said, different perspectives and different philosophies on these issues, on economic policy in particular. And one thing we did see last time is there's competition among those voices. There was then and there certainly will be again. It's obvious based on the stories that we're seeing. So I think a lot of it oftentimes depends on who's the last person in Trump's ear when he's making a decision. He changes his mind on things. He changes his view.

So that we are at the stage right now. We haven't gotten to the inauguration yet. We are about to start hearing from folks at their confirmation hearings. But we're trying to figure out who will have the most influence on these decisions, which view will win out with the president. And it is so hard to know at this point how these details are going to shake out. Just staying with you, Kate, because you oversee the Fed coverage. I mean, we did have quite a lot of voices coming from the Fed in the last week.

Fed policymakers in the last couple of weeks, and those have fed into these changing expectations around what the Fed's going to do. Do you think there's a, is there a risk or a sense that Trump administration officials or Donald Trump himself are just going to blame the Fed for all of this? And at some point, we'll just say, oh, you know, this is the only reason the markets are weak is because they're getting it wrong on interest rates and interest rates are going to be too high. Do you think there's a risk of that?

Absolutely. I mean, I think we saw in his first term Trump was not shy about saying what he thought about the Fed and monetary policy and criticizing when he thought they did something wrong. And to be fair, I think whenever something goes wrong, the Fed could always take the blame. It's not exclusive to Donald Trump. But but for sure, I think that there is a very big political risk for the central bank.

And I think that they are probably bracing for a lot of incoming over the next year and a lot of pressure to ease up, to help support the economy. I don't think that Trump is particularly concerned about whether it's appropriate that the president, you know, there are these longstanding norms that he shifted from that the White House shouldn't, they shouldn't say anything. They shouldn't even say what they think interest rates should be. And Trump came out over the summer, last summer, and said, well, why not? I mean, I should be able to have a say. I'm not telling them what to do, but I should say what

rate should be. So I don't think he'll be shy about saying if he thinks they're doing the wrong thing, nor about telling them what they should be doing. Well, as you remember, our editor-in-chief, when he sat down with Donald Trump in Chicago in September, he talked to him about the Fed. And yeah, he was quite clear, not only that he thought he should be able to give his advice, but they had a pretty easy job and they hadn't had to do very much. I think it's the greatest job in government. You show up to the office once a month and you say, let's see, flip a coin.

And everybody talks about you like you're a god. Oh, what will he do? I mean, I think I have the right to say I think you should go up or down a little bit. I don't think I should be allowed to order it, but I think I have the right to put in comments as to whether or not interest rates should go up or down. I saw Christine Lagarde, the head of the European Central Bank, came back saying, no, no, we actually do have quite a hard job. He should come and visit us. And, you know, I have...

I have thousands of hardworking people, economists, jurists, computer scientists, and I can assure you that they work super hard every day, not just once a month. We should sort of spare a thought for the rest of the world in this. And I'm speaking in London, and I think London has particularly borne the brunt

this sort of change in market sentiment in the US, probably not entirely from anything that the UK has done, but we've seen as the cost of borrowing has gone up in the US, it's also gone up everywhere, and particularly in the UK. It's not entirely clear why. The pound has fallen. There's a sort of sense that whatever it means for the US and

and the sort of strength of the US economy, it is already exporting quite a lot of pain and quite a lot of policy challenges to other countries who are facing possibly, you know, a tougher time with their economy than the US, you know, slower growth and a quite stubborn inflation.

Anna, I mean, this is something that has an international impact. That's right. Indeed, I could see what you mean. In fact, the UK 10-year bond yields has increased by almost 100 basis points since August, particularly sharply in December. And it sort of heightens the challenge that the Trump policies pose because, you know, you have a strong US economy that people are already having to deal with. And then if...

He is adding fuel to the fire with these expansionary policies, although it makes everyone feel very upbeat about the US. I guess the risk is it's also just sort of sucking money into the US and it

sharing a lot of higher cost of borrowing with other countries. But I'm fascinated, when you were sort of briefing and writing memos in the Council of Economic Advisers under Trump, Anna, how much focus was there on the markets day to day? I mean, I don't imagine, I know Donald Trump probably wasn't sitting and looking at his Bloomberg terminal. But do you think there will be an awareness day to day about what's going on and a concern? Anna Jones

So, first of all, when I was there, Larry Kudlow was the director of the NEC. So he talks to Trump all the time. He sits in the West Wing, in fact, in the little room in the West Wing. And second, Trump also has Fox News on his television set all day long. So he would be staring at whatever Fox News is showing. So he would be very aware of the market movements.

And then ultimately, do you think it will still come down to the stock market, what the stock market does, rather than sort of what he might consider slightly more obscure changes in 10-year yields and 30-year yields? Absolutely. So I was there in CEA during the de-escalatory phase of the trade war. And

The factors that drove this subtle change in attitude toward taking a deal with China at that time was because the stock market has been falling. And the manufacturing employment data was showing that, in fact, manufacturing payrolls have been plunging ever since the tranche three of the massive recession.

tariffs on the consumption goods from China. So that was like the last two tranches of the US-China tariff escalation. And so he could change. I think what he's doing is he will be trying to push the tariff higher to a point where he sees the market begins to have a negative attitude. And when those cracks are forming, he's going to de-escalate. Well,

I think we're never going to have a full answer to this, but we will see how it unfolds over the next few months. I've heard quite a few economists over here anyway say to me they felt, at least for the US, that what had happened is a sort of healthy reset. And they even suggested that it could be a wake-up call or a sound of warning sign for the incoming administration that they maybe don't want to overheat things too much early on when it comes to things like

tax cuts and big constraints on immigration or trade wars. But it's certainly been a wake-up call already for countries like the UK. And in a week's time, next time you hear this podcast, I will be on the top of a mountain at the World Economic Forum and Donald Trump will be president. Thank you very much, Kate and Anna, for joining us this week. Sure. Thank you for having me. Thank you. See you again. Thank you.

Thanks for listening to the first formal episode of Trumponomics from Bloomberg. It was hosted by me, Stephanie Flanders, and I was joined by Anna Wong and Kate Davidson. Trumponomics is produced by Samar Sadi and Moses Andam, with sound design by Blake Maples. Brendan Francis Noonan is our executive producer. Please help others find the show, rate and review it wherever you listened. ♪

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