Will Investors Push Back Against Trump's Massive Borrowing Plans?

Market observers warn an expanding U.S. budget deficit and aggressive trade policies under President Donald Trump could test investors’ appetite for government debt, despite campaign promises to lower borrowing costs.

Treasury yields have fluctuated since Trump’s election, initially spiking to 4.8% before settling at 4.6%, according to the Financial Times. Investors now balance inflation concerns against fears that new tariffs could slow economic growth.

The Congressional Budget Office projects the government deficit will reach $1.9 trillion, or 6.2% of GDP, by Sept. 30. It could grow to $2.7 trillion by 2035, far exceeding the 50-year average deficit of 3.8%.

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“The investment community in general is certainly uncertain, and perhaps nervous, but it’s not obvious whether they should be more worried about recession or inflation,” David Kelly, chief global strategist at JPMorgan Asset Management, told the Financial Times.

House Republicans have proposed tax cuts potentially reaching $4.5 trillion, alongside a $4 trillion debt ceiling increase. The Committee for a Responsible Federal Budget estimates the changes could add $2.8 trillion to the deficit through 2034.

International investors have already shown signs of hesitation. Japan and China, the largest foreign Treasury holders, reduced their positions throughout 2024. Foreign investors sold $50 billion in long-term Treasuries in December alone, the highest amount since May 2021, according to the Financial Times.

“Is the debt financeable? It is, until it isn’t,” Mark Sobel, former Treasury official and U.S. chair of think-tank Official Monetary and Financial Institutions Forum, said.

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Treasury Secretary Scott Bessent faces pressure to maintain market confidence while pursuing expansionary policies. However, analysts suggest U.S. debt retains advantages through market liquidity and the dollar’s reserve currency status.

The Federal Reserve’s quantitative tightening program, reducing its Treasury holdings since mid-2022, adds another variable as the government potentially increases debt issuance, the Financial Times reported.

“The scale and scope of the fiscal deficit could be quite large and could be relatively long term,” Ed Al-Hussainy, rates analyst at Columbia Threadneedle Investments, told the Financial Times. “That’s the main thing that could be damaging for the rates market.”

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