Could the Bond Market Stymie Trump’s Economic Plans?

With Republicans poised to seize control of Congress, Donald Trump’s economic plans could face little legislative resistance. The president-elect has vowed to escalate tariffs, extend a corporate tax cut and introduce tax breaks on tips and Social Security benefits, policies that some fiscal hawks worry would increase the federal deficit, and with it, inflation.

But even if Trump faces meager resistance on Capitol Hill, another force may temper his policies: the bond market.

While stocks just pulled off a record-setting week, with the S&P 500 gaining roughly 5 percent since Election Day, a volatile bond market signals that investors have some worries that an unchecked Trump agenda might stimulate growth but worsen the country’s debt burden.

“If the Trump administration runs excessively stimulative fiscal policy, with lots of spending and tax cuts, leading to even wider deficits, I think then that may cause the bond vigilantes to push yields up to levels that create problems for the economy,” Ed Yardeni, the president of Yardeni Research, told DealBook.

Yardeni, a veteran Wall Street analyst, coined the term “bond vigilantes” in the 1980s to describe the influence that frustrated bondholders can have on the policy agendas of politicians and central bankers. He sees a potential for bond vigilantes to pose a risk to the Trump agenda, too.

The United States sells Treasury bonds and notes to fund big parts of the federal government. These auctions provide the lifeblood of the U.S. economy, and the yields on Treasuries are viewed as a real-time gauge of the country’s financial health. Yields tend to climb when investors anticipate economic growth accelerating inflation, and expect the Fed may have to raise rates to slow the economy. Higher yields mean the government pays more to borrow.