Vigilantes...
US stocks tried to recover on Wednesday with the S&P 500 closing 0.1% higher, the Dow gaining 106 points and the Nasdaq slightly lower.
The bond market stabilised following a $22 billion US Treasury sale that provided some relief after recent spikes in yields.
Major tech companies saw slight gains, with Apple (0.1%), Nvidia (0.1%), and Amazon (0.5%) up by small margins, while Microsoft (0.6%) and Tesla (+1%) posted more noticeable increases.
However, Meta's stock dropped by more than 0.5%.
US stock markets were closed on January 9 for a national day of mourning for former President Jimmy Carter.
This years blockbuster action looks set to be in the bond markets as Trump’s new administration goes head-to-head with those mightiest of opponents – bond vigilantes.
The US government’s budget deficit is currently running at 7.5% of GDP, with overall federal government debt now 123% of GDP, the biggest debt burden relative to national income since at least the late 18th century.
The IMF calculates (chart below) that the net supply of bonds needing to be purchased by investors will be equivalent to more than 10% of GDP this year, and for each of the subsequent five years.
To be clear, these estimates do not include the fiscal promises Donald Trump made in the run up to the election. These are estimated to add $7.8 trillion to federal debt over the next decade – roughly a 25% increase on current projections, even after including $2.7 trillion of additional revenue raised via import tariffs – a highly questionable revenue source.
By the end of 2024, bond investors look likely to have suffered the fourth year of a bond bear market – enough to make anyone grumpy. Now they are being asked to buy record amounts of US government bonds for the next five years.
The vigilantes are not back – yet. But this time they would have a much stronger case.