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And as you probably heard me say, we picked up since just the election three trillion dollars in you go it worth or value, but three trillion dollars was picked up since November fifth, so that's pretty good.
I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this week we're asking does the bomb market have it in for Donald Trump? And if so, should he care?
With me?
Anna Wong, Chief US Economists at Bloomberg Economics. She's worked at the FED and served in the Trump White House in twenty nineteen and twenty twenty once a comment at the Council of Economic Advisors. Hello, Anna, Hi, Stephanie, and Kate Davidson, managing editor who covers you economic policy for Bloomberg News in Washington, d C. Thanks for joining us, Kate, Hi, Stephanie,
the rest of you listening. Maybe just getting settled into twenty twenty five, 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 center. 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. About what level do tenure yield or to rate really begin to hit the economy.
I think that's the question.
The yield on a US ten year treasury bond roughly what it costs Uncle Sam to borrow for ten 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 five percent. Now, that may not sound like much, but we haven't seen long term rates that high in nearly twenty years. Of course, everyone on Planet Bloomberg cares a lot about all aspects of this, 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 Trumpnomics, 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 ped year yields have risen by one hundred basis point even though the FED has
cut by over one hundred basis point. 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 attaped inflation. I've also heard maybe because investors have lost confidence over the fiscal sustainability. I've also heard maybe it's
Trump's 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 explanation, personally, what I've found most convincing is that it's a combination of a resetting of expectation of FED rate cuts due to better economic growth prospect as well as and increase in real rate.
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 the interest rates. They're so clearly worried and I do think he has some reasons to worry because, as I said, the reprising of the ten year yields started in September, but a lot of that action also happened after the December of RMC meeting, and in that meeting, the Fed sharply increased their inflation outlook in twenty twenty five on expectations of Trump policies, tariffs, policies, deportations, so the Minute suggest So if that's the case, then
from the Fed perspective, the reason why they are not planning to cut as much in twenty twenty five partly has to do with Trump policies policies that has not happened yet, and that is already all baked into ten 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.
Okay, do 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, or 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 and higher yield. I think that that could raise some worries, and it's maybe starting to a little bit about how much more deficit spending they can do in the form of you know, def asit 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 sur 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 debts. Already, I think the debt service costs are bigger than the defense 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 all 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 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 Bessett is very much aware of what's happening in the barn market. He's made some comments, you know, the past few months about how Treasury Secretary Jennet 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 you know significant, even if it's just psychologically significant five percent threshold would get a lot more intention 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 pyped out by the stop market reacting in the last few days to the rising interest rates, because if you think about it, you know, if 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 you know, one way of thinking about it. So we have already seen a response on
a 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 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 the Trump was serious about imposing a universe tariffs, a twenty percent universal tariffs for example, could raise the core PC by one percentage point. Then it's possible that we will see a rake pike at the end of twenty twenty five or early twenty twenty six.
But do you think there would be any voices in the White House saying, you know what, we don't want to bond market meltdown for people to start really questioning US debt or demanding you know, ever higher cost to borrow. Do you think that there 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 would be those voices, it would be Scott Byssant and Kevin Hassett and.
Just remind us what jobs they're going to have in the next administration.
So Scott destined would be the US Treasury Secretary and Kevin Hassett would be the NEC director. And in their influence on Trump to a large extent depends on their personal relationship with Trump, and both of them had been known as not friendly to tear. 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, we call it a couple of weeks ago. In fact it was I think it was just last week.
There was a leak in Washington posts suggesting that some people in Trump orbit are proposing a more targeted tariff, and to extent that those are leaked by people in Scott Bessent's camp. And now this gets into palace intrigue ry, then it could be hurting the relationship of Scott Bessent and Trump because the folks around Trump, especially characters like Peter Navarro, who's playing a pretty important role as a
shadowy person. Leak's actually flows 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 it could I think it could take a toll on the personal relationship between people like Howard Ludnick and start the center Trump if that continues.
Kate, we should probably spend a minute on that. Although it's not directly on the bomb 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 the promise to put tariffs on most imports coming into the US. You know, we did see last week a lot of back and forth and the 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 would be closer to what he said on the campaign trail. I mean, we thought it was going to be terribly disciplined, but it's 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, won't be exactly the same. And as you mentioned, Stephanie Wright, in 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, at 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 went 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 Fed policy makers 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 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 market's a week 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 when I or something goes wrong, the FED could always
take the blame. It's not exclusive to Donald Trump. 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. There are these long standing 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 reach 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 at Chicago in September, he 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 say flipp acle and everybody talks about you like you're a god.
Oh what will we 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, which I saw.
Christine Legard, at the head of the European Central Bank came back saying, no, no, we actually do have quite a hard job.
You should come and visit us. And you know I have. I have thousands of hard working people, economist, jurists, a computer scientist, 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 of this sort of change in market sentiment in the US, probably not entirely from anything that the UK 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 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 are quite stubborn inflation. Anna, I mean this is something that this is something that has an international impact.
And that's right. Indeed, I could see what you mean that that in fact, the UK tenure bond yields has increased by almost one hundred 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 sharing a lot of higher cost of borrowing with other countries.
But I'm fascinating when you were sort of briefing and writing memos in the Council of Economic Advisors under Trump and 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 it looking at his Bloomberg terminal.
But.
Do you think there will be an awareness day to day about what's going on in a concern?
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 a 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 News is showing, so he would be very aware of the market movement.
And then ultimately, do you think it will still be come down to the stock market what the stock market does, rather than sort of what he might consider slightly more obscure changes in ten year yields and thirty 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 tranch three of the tariffs of the massive tariffs
on the consumption bits from China. So that was like the last two tranches of the US China tariff escalation, and so he could I think what he's doing is he will be trying to push the tariff hire to a point where he sees the markets 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 anyways say to me they felt, at least for the US, that what had happened as 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 the 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.
Thanks for listening to the first formal episode of Trumpernomics from Bloomberg. It was hosted by Me, Stephanie Flanders and I was joined by Anna Wong and Kate Davidson. Trumponomics is produced by Summersadi and Moses and Dam, with sound designed by Blake Maples. Brendan Francis Newnham is our executive producer. Please help others find the show, rate and review it wherever you listened