Donald Trump is getting caught ever deeper in an economic bind.
The increase in the interest rate on US government borrowing after its debt was downgraded by Moody’s, the ratings agency, late on Friday, will increase the cost to the US of rolling over its massive debt and reduce budgetary room for manoeuvre. An emerging deal with Congress on the budget looks set to make things worse, leaving the US at the mercy of bond investors.
Following the news from Moody’s, the yield, or interest rate, on 30-year US debt traded above 5 per cent on Monday. The downgrade from the highest triple-A status was no surprise and nor will it lead to regulatory pressure on financial investors to sell, as US bonds still have an A rating.
However, it does underline the potential constraint of bond investors on Trump’s room for manoeuvre.
Over the weekend, a key Congressional committee approved a budget proposal from the administration set to cut taxes but not cut spending to match.
Trump argues that the resulting higher growth will boost taxes, but the independent Congressional Budget Office says it will increase the deficit, already at a high 6.4 per cent. And this will add to the huge $36 trillion national debt.
The risk for Trump is a worsening loss of confidence from bond investors, meaning it will cost more and more to refinance expiring debt. He hopes to close some of the gap by increasing tariffs, but we saw back after “Liberation Day” in April how this prospect unsettled bond investors.
Threats by Treasury Secretary Scott Bessent over the weekend to reimpose higher tariffs on countries with which there are no trade deals may reflect this need to raise cash, but this will not increase confidence in US policy.
The risk is that this starts to drive away funds from all US assets – both equities and bonds – creating the kind of market upheaval which Trump’s wealthy backers will not like and which will unsettle the wider public.
