How America’s indebtedness is trimming Donald Trump’s wings – Jenée Tibshraeny

The bond market is described as US President Donald Trump's Achilles heel. Photo / Getty Images

We live in a world so turbulent, the only certainty is the existence of uncertainty.

However, we can be mildly assured that some guardrails remain in place that are constraining the wrecking ball that is United States President Donald Trump.

We aren’t talking laws, agreements or institutions. Rather, these guardrails are comprised of investors from around the world that the US Government is indebted to – the “bond vigilantes”.

Trump needs interest rates to fall to stimulate growth and ease the cost of servicing the US’ big pile of government debt.

Yet the more brazen he gets with tariff policies and threats to erode the independence of the Federal Reserve, the riskier he makes investing in US Government debt, otherwise known as bonds or treasuries.

If investors believe they’re taking on more risk, they’ll demand higher returns.

Given the US’ net debt is nearing 100% of Gross Domestic Product (New Zealand’s is at 25% according to the same measure of debt used in an IMF comparison), its interest costs are material.

Indeed, they’re so eye-watering, a spike in US Government bond yields a fortnight ago pushed Trump to announce a 90-day pause on his proposed tariff hikes for countries other than China.

Harbour Asset Management co-chief executive Andrew Bascand characterised the bond market as the US’ “Achilles heel”.

He described the recent sudden jump in US Government bond yields as “an awakening moment for the advisers to the President, for Republicans in Congress, and for businesspeople to say, ‘We need a well-functioning US bond market with reasonable interest rates’”.

ANZ chief economist Sharon Zollner said the US was reliant on the rest of the world to fund its current account deficit and fiscal deficit, worth 7.3% of GDP in 2024.

“That is something you can’t bully your way out of. And it’s not one person you need to convince – it’s a herd [of investors] that can run, unexpectedly, in unexpected directions,” she said.

Zollner likened the bond market’s response to Trump’s initial tariff proposal to its response to Liz Truss’ proposed big-spend budget that saw her 2022 tenure as British Prime Minister compared to the lifespan of a lettuce.

“When you have a lot of debt, you have fewer options. That’s always true,” Zollner said.

However, she feared the market’s reaction to the tariffs marked more than a bout of volatility.

Zollner and Bascand noted that it was unusual for both equity and bond prices to fall and for the US dollar to lose value at the same time.

The situation reflected the fact that investors no longer saw US Government bonds and the US dollar as safe havens during times of instability.

Zollner noted this meant we could no longer rely on the New Zealand dollar depreciating against the US during these periods – a dynamic that had in the past supported New Zealand exporters, and therefore the economy more generally.

“The idea that US bonds are a hedge against equity volatility is built into every investment portfolio everywhere,” Zollner said.

“And if it’s now up for question, that raises potential for some pretty large movements of capital throughout the world, which has potentially very large consequences for exchange rates.”

Zollner was worried some of the conventions that had previously guided investors’ asset allocations and approaches towards risk management were up in the air.

This is wiping trillions off various investment funds around the world, and calling into question what constitutes a low, medium, or high-risk investment going into the future.

Bascand believed a silver lining was that households and banks were better placed to withstand shocks than they were during the likes of the 2009 Global Financial Crisis. Indeed, banks are well capitalised.

With the Official Cash Rate at 3.5%, Zollner also noted the Reserve Bank of New Zealand (RBNZ) had quite a bit of room to loosen monetary policy to support the economy.

She believed some of the fears this would spur rampant house price inflation, as it did during the pandemic, would be curtailed by the RBNZ’s introduction of debt-to-income restrictions on banks’ mortgage lending.

As for the RBNZ intervening in the bond market, like it did during the pandemic, or using the war chest of foreign currency assets it’s been accumulating should it need to step into the currency market, Bascand couldn’t see this being necessary – for now at least.

In the meantime, Bascand was confident in the bond market’s efficacy tempering Trump.

Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.