With Republicans poised to seize control of Congress, Donald Trump’s economic plans could face little legislative resistance. The president-elect has vowed to escalate tariffs, extend a corporate tax cut and introduce tax breaks on tips and Social Security benefits, policies that some fiscal hawks worry would increase the federal deficit, and with it, inflation.
But even if Trump faces meager resistance on Capitol Hill, another force may temper his policies: the bond market.
While stocks just pulled off a record-setting week, with the S&P 500 gaining roughly 5 percent since Election Day, a volatile bond market signals that investors have some worries that an unchecked Trump agenda might stimulate growth but worsen the country’s debt burden.
“If the Trump administration runs excessively stimulative fiscal policy, with lots of spending and tax cuts, leading to even wider deficits, I think then that may cause the bond vigilantes to push yields up to levels that create problems for the economy,” Ed Yardeni, the president of Yardeni Research, told DealBook.
Yardeni, a veteran Wall Street analyst, coined the term “bond vigilantes” in the 1980s to describe the influence that frustrated bondholders can have on the policy agendas of politicians and central bankers. He sees a potential for bond vigilantes to pose a risk to the Trump agenda, too.
The United States sells Treasury bonds and notes to fund big parts of the federal government. These auctions provide the lifeblood of the U.S. economy, and the yields on Treasuries are viewed as a real-time gauge of the country’s financial health. Yields tend to climb when investors anticipate economic growth accelerating inflation, and expect the Fed may have to raise rates to slow the economy. Higher yields mean the government pays more to borrow.
A spike in bond yields in 2007 signaled trouble in the housing market. A year later, Bear Stearns collapsed. A sell-off in bonds pushed the Clinton administration in the 1990s to ultimately abandon a policy of high deficit spending. After that policy reversal, James Carville, President Clinton’s political strategist, quipped that if he were to be reincarnated, he “would want to come back as the bond market. You can intimidate everybody.” Bond vigilantes helped push Liz Truss out of her job as British prime minister in 2022.
Since September, alarm bells have been ringing as the yield on a 10-year Treasury note has jumped roughly 70 basis points, a huge move. That occurred even as the Fed started to cut its benchmark lending rate, with the aim of lowering borrowing costs for businesses and households.
A spike in yields can be problematic for the government, and for consumers: The average rate on a 30-year mortgage, which tends to trend in line with rates on long-dated Treasury bonds, jumped this week to the highest level since July, unwinding some of the Fed’s work to bring down borrowing costs.
Bond investors are concerned that the Fed may continue lowering rates while the economy is growing robustly, risking more inflation. They also worry about the $1.8 trillion deficit, and that Washington is doing little to rein in spending. Trump’s plans, including the tariffs, could add as much as $7.5 trillion to the debt over the next decade, according to the Congressional Budget Office.
“The vigilantes take law and order into their own hands when they figure the authorities aren’t accomplishing the job they want to see accomplished,” Yardeni said.
Jay Powell, the Fed chair, this week downplayed the recent spike in Treasury yields, and suggested that the central bank’s outlook for interest rates would not be affected by Trump’s economic plans. But a number of Wall Street economists now think the inflation risk of Trumponomics will be enough to force the Fed to pause interest-rate cuts, likely next year. They also see room for yields to go higher unless Washington shows some fiscal restraint.
“I think the bond vigilante risk is still out there,” especially if Trump’s economic plans add to the deficit, Lawrence Gillum, the chief fixed-income strategist for LPL Financial, told DealBook.
— Bernhard Warner
IN CASE YOU MISSED IT
Donald Trump started filling top jobs. He named Susie Wiles, his top political aide, as his chief of staff and said Robert F. Kennedy Jr., a vaccine skeptic, would have a big role in shaping health policy. Wall Street has been speculating that the former S.E.C. chair Jay Clayton or the hedge fund managers Scott Bessent and John Paulson could be up for Treasury secretary.
Businesses stocked up in anticipation of Trump tariffs. The president-elect has said he would introduce a 10 to 20 percent tax on most foreign goods and a 60 percent tax on products from China. While much remains unknown about Trump’s plans, some companies moved to stock up on supplies and products from China or said they would move operations out of the country.
Elon Musk joined a call with the Ukrainian president. Musk was with Trump at Mar-a-Lago when the president-elect handed him the phone during a conversation with Volodymyr Zelensky. It is unclear whether U.S. policy toward Ukraine was discussed on the call, which was reported earlier by Axios. But it raises questions about the access that Musk, a major government contractor and one of Trump’s biggest financial backers, will have during the second Trump presidency.
The Federal Reserve cut interest rates by a quarter point. The central bank gave the latest signal that is believes inflation is back in check just days after Trump won the election. Trump has suggested that a president should be able to influence Fed policy and that he could sideline Powell before the end of the Fed chair’s term. On Thursday, when Powell was asked if he would resign should Trump ask, Powell said, “No.”
Expats are rooting for this Trump tax policy
After Donald Trump won the election, many Democrats said they wanted to leave the country. If the president-elect follows through on one of his many tax proposals, it might get a little bit easier, Vivienne Walt reports for DealBook.
In a video address last month, Trump told the nine million or so Americans who live in other countries: “I’m going to end double taxation on overseas citizens. You’ve been wanting this for years, and nobody has listened to you.”
He was referring to the United States’ citizen-based tax system, which is virtually unique in the world and requires Americans living abroad — even those who were born in the United States but never lived there — to file U.S. taxes. Under the 2010 Foreign Account Tax Compliance Act, or FATCA, foreign banks are obligated to report U.S. clients’ accounts to the I.R.S. yearly.
Some expats feel caught in a maze. Fearing 30 percent penalties, many banks have simply shut accounts of those with even tenuous U.S. links, or rejected taking them as clients. And expats are sometimes stunned to learn they owe taxes to the U.S. government.
“We sold our small, solely Canada company but had to pay the I.R.S. more than 20,000 Canadian dollars (about $14,391),” said Suzanne Herman, 68, in Gibsons, British Columbia, who left the United States at age 12. She paid the I.R.S. $5,700 in penalties for her 2008 house sale in Canada, and now pays $2,880 a year for U.S. tax preparation.
For many like Herman, the simplest option is to renounce their U.S. citizenship, and the numbers doing so have rocketed tenfold since 2020.
FATCA’s dragnet: Democratic lawmakers argued in Senate hearings in April that FATCA enforcement targeted wealthy tax evaders, not unwitting foreigners.
Expats say that’s misleading. “There is this mythology that Americans outside the U.S. are rich fat-cat tax cheats,” said Keith Redmond, an American who lives in Paris and a co-founder of Stop Extraterritorial American Taxation. “Americans overseas are average folk.”
The requirement for banks to share data with the I.R.S. has flouted other countries’ norms. The European Union ruled in 2021 that FATCA’s data sharing violated its privacy laws. But governments and banks felt they had little choice but to comply. “As long as the dollar is the reserve currency, other countries will fall in line,” Redmond said. “They really need to push back.”
Will Trump follow through? Expats are tempering their expectations, knowing Trump has broken promises before. “It is just words,” said Anthony Parent, a Connecticut lawyer who handles FATCA problems, told DealBook. “He said, ‘I will end this,’” Parent said of Trump. If he fails to do so, “it will never come again.”
40%
— Increase in the quantity of wine sales on the delivery platform DoorDash during Election Day, compared with the previous six Tuesdays. DoorDash also clocked a 30 percent increase in the number of alcohol sales and “increases in orders for candy, coffee and comfort foods like hamburgers, fries and chicken nuggets,” said Alanna Shipley, the company’s head of audience insights.
Quiz: The stock market’s biggest election winners
Stocks have soared since Trump was declared the election winner early Wednesday, with investors feeling generally sunny about his promises to cut corporate taxes and reduce regulations. But some stocks got a particular boost from the potential impact of Trump’s other policies. Which saw the biggest swing this week?
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Coinbase
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Discover
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Tesla
The answer is Coinbase, which spiked roughly 50 percent this week, mirroring a surge in the price of Bitcoin and other cryptocurrencies as big spending by crypto companies in congressional races paid off with wins by pro-crypto candidates.
Tesla, whose shares rose roughly 30 percent this week, stands to benefit from reduced subsidies for electric vehicles, which will hurt its competitors most, as well as Trump’s relationship with Musk, its C.E.O. And Discover saw a roughly 15 percent increase, most likely driven by a bet that the Trump administration will approve the company’s $35 billion merger with Capital One.
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