Bond Market Spiral?: JD VANCE Warning

Well, I have to admit, I’ve been incorrectly wearing my “Bond Market Bull” hat ever since the Federal Reserve cut interest rates by 50 basis points. I thought, “Hey, inflation is peeking around the corner, corporate earnings are whispering sweet nothings about their lack of pricing power, and the Federal Reserve might just speed up their rate cuts.” So, naturally, I concluded that bond yields would only go down, leading to a glorious rise in bond prices. Alas, my crystal ball failed to catch JD Vance’s conversation with Tucker Carlson about the implications of pricing in a potential Donald Trump presidency. But hey, don’t take my word for it; let’s hear what JD Vance said on September 18, the very day the Federal Reserve decided to cut interest rates by 50 basis points. Then we can discuss what this all means for bond yields—spoiler alert: not great—and what it could mean for the future depending on who occupies the Oval Office. Here we go.

JD Vance appeared on Tucker Carlson's show and the conversation went like this..."The thing I really worry about on bond markets is okay. We have call it 1.6 to $2 trillion in debt every single year in this country getting added to the national debt. And the only thing that really makes that serviceable is that interest rates are still pretty low, right? They're about four and a half percent right now. If interest rates go to 8% and you're actually spending way more to service the debt than you are on actual good services and infrastructure for your country, like that can become a huge spiral that could take down the finances of this country. We've never had that in 200 plus years of being an American republic. We've never had a true debt spiral in this country. So I really worry about do the bond markets, do the international investors, the people who are getting rich off of globalization, the people who have gotten rich from shipping our manufacturing base to China, the people who have gotten rich from a lot of wars, do they try to take down the Trump presidency by spiking bond rates? And one of the things that I think a lot about, and I talked to the President about this a lot, is when we think about who we're choosing as Treasury Secretary, one of the things the President, of course, it's his choice ultimately, is we've got to find the guy who's going to make sure that we can manage this country through a real time of crisis where we get the country's finances back on track. That is one of the ways they could take down Donald Trump. You have to ask yourself, the tools at their disposal. They're doing everything they can to manipulate voters. I don't think it's going to work, but if Trump wins, it's not just going to be smooth sailing for four years. They're going to do everything that they can to take so the key numbers that interest rate, I think that's probably the most, the most important, in the most impactful way they could try to take down his presidency is by spiking the interest rates."

You saw this, by the way, Tucker, with Liz Truss in Britain. I disagree with her on a lot of issues, so I'm not trying to stand up or say Liz Truss is my person. But look, she came in, she had a plan, and the Bank of England made a lot of mistakes. Maybe these were intentional. Interest rates shot through the roof, and it took down her government in a matter of days.

So, let’s take a moment to digest this prophecy of doom regarding the Trump presidency, potentially felled by rising interest rates and the bond market. Now, Liz Truss took office on September 6, 2022, which is impressive considering she was about as stable as a Jenga tower in a windstorm. Just look at the 10-year gilt, the UK’s version of a bond. You’ll notice that between August and the end of September—and then the beginning of October—during Liz’s brief administration, which lasted less time than a n exposed avocado, yields shot up. Sure, they came down once she was replaced, but not by as much as they’d risen. It was like a rollercoaster ride that no one wanted to take. We saw a spike from 2.3% to about 4.1%. That’s a 1.8 percentage point increase in yield, causing massive losses for bond market investors, all thanks to fears generated by a Truss-led government.

And here’s JD Vance on the day of the Federal Reserve’s 50 basis point cut, raising the alarm about the bond market pricing in a Trump presidency that might send interest rates skyrocketing. Since then, as you can see on this chart, the 10-year treasury yield has leaped from about 3.65% to around 4.27%. Now, that’s not quite the catastrophic leap seen during the Truss era, but Vance is effectively shouting, “Hey, this could really mess us up!”

But why, you ask, could rising yields spell disaster for a Trump administration? Well, let’s break it down. In 2007, the Federal Reserve cut interest rates on September 18 by 50 basis points, lowering them from 5.25% to 4.75%. Fast forward 17 years, and voilà, we just did the same thing again—aren’t we clever? But back then, it was a warm-up act for the Great Recession, and everyone insists this time is different. Yet, what contributed to the financial crisis of 2007–2009? You guessed it: rising yields.

And this is precisely what JD Vance is sweating over. He’s sharp enough to recognize that if markets start thinking a Trump administration will lead to rising yields, it’ll complicate our ability to manage that massive debt. Plus, it could usher in a recession. When yields rise while the Federal Reserve is trying to ease monetary policy, it’s like trying to swim with concrete shoes. It gets harder to expand businesses, hire people, or invest in shiny new capital because interest rates are, you guessed it, even higher.

Now let’s toss in some thoughts from Rabobank and Nick T over at The Wall Street Journal. This isn’t a personal attack on the Trump administration; it’s merely a peek at the views being tossed around about both candidates. Rabobank suggests that a Trump presidency means tax cuts for corporations and households, deregulation, and a potential axing of electric vehicle tax credits. Oh, and we might see a halt in illegal immigration, alongside a single-handed imposition of tariffs ranging from 10% to 20%. Let’s take a gander at the PDF so you can see the source and confirm I’m not just spinning tales. Here it is. It suggests that Trump could impose those tariffs while Kamala Harris would likely play the Biden playbook, focusing on health care costs, tax hikes for the wealthy, and tax cuts for the middle class, all while attempting to curb price gouging and providing down payment assistance for first-time homebuyers.

So, what’s the bottom line? According to their analysis, a Trump presidency could lead to a yearly inflation spike, while a Harris administration would maintain a lower inflation rate. They even projected inflation under Trump at 2.7% in 2026 and 4.0% in 2027, while Harris would be sitting pretty at 2.3% during the same years.

In a nutshell, with just a week to go before the elections, the Harris bounce is fading. A Trump presidency would likely lead to universal tariffs, higher taxes, and deregulation. Meanwhile, Harris would continue with targeted tariffs and lower health care costs. The catch? Both scenarios could elevate inflation for a prolonged period. And all of this talk about tariffs is just adding fuel to the inflation fire, leaving us pondering whether we’re heading toward an economic circus.

Nick T at The Wall Street Journal also weighs in, citing the Peterson Institute, a well-respected and apparently neutral source. He argues that both candidates’ policies could support growth but also keep inflation elevated for longer. The Peterson Institute suggests that deporting immigrants might significantly reduce economic output while boosting inflation. So, if you kick out the unauthorized immigrants, you might just see 88,000 Americans lose their jobs. Not exactly a win-win.

To wrap this up, Trump believes he can ward off inflation, claiming that we didn’t have it in 2016, so why should we worry now? But let’s not forget JD Vance’s ominous warning. If you’re wondering why bond trading feels a bit shaky, you’re not alone. This comparison, drawn from JD Vance’s warnings, highlights the potential recessionary impacts markets could impose on Trump without him lifting a finger—just on the expectation of his presidency. So, buckle up and brace for impact if you’re long on bonds and Trump wins. Keep your eyes peeled!