Tapping into voters’ dissatisfaction with the economy, among other issues, Donald Trump won the popular vote in the presidential election on Tuesday night.
Meanwhile, bond traders on Wall Street dubbed “bond vigilantes” remain worried about long-term economic prospects under a Trump presidency.
What Are Bond Vigilantes?: A bond vigilante is an investor who protests against inflationary monetary or fiscal policies by selling bonds. This, in turn, increases bond yields which can force politicians’ hand against inflationary policies.
Inflation necessitates increases in interest rates which erode the value of bonds.
Yields increased sharply during the Clinton administration during a period of concern over fiscal spending. The administration subsequently reduced the federal deficit, leading yields to recede.
The Trump Campaign: Trump’s 2024 campaign focused on populist economic policies, including high tariffs on imported goods and a possible elimination of the income tax. Experts say that Trump’s agenda would spur economic growth but would be highly inflationary.
Trump ran on tax cuts in his 2016 election win and enacted the Tax Cuts and Jobs, which boosted corporate investment but added $1.9 trillion to the U.S. national debt.
If Trump follows through on his policy commitments — which could be likely with a solidly red Senate and a yet-to-be-called House of Representatives — the fiscal deficit will balloon.
The Bond Market Reacts: The bond market quickly reacted to Trump’s win. The benchmark 10-year Treasury yield rose to 4.479%, its highest mark since July.
Much of Trump’s win was already priced in by the markets —10-year yields are up over seven-tenths of a percentage point since early September.
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