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Important stories about money and politics in the race for the White House
The world is currently watching the US election with bated breath. That’s because the latest FT poll suggests Republican candidate Donald Trump has a narrow lead over Vice President Kamala Harris, but the race is likely to remain close until Election Day. . But as experts analyze the polls, Paul Tudor Jones, the hedge fund master who shot to fame by predicting the 1987 stock market crash, says investors should focus on something else. I think it’s good, that is, U.S. bonds.
He argues that neither candidate is “up to the job at hand” when it comes to developing policies that the market can trust. He told CNBC this week, citing economist Hyman Minsky’s view that investors can ignore risk for years before confidence suddenly collapses. It’s whether we’ll have a Minsky moment or not.” He added: “What they (both parties) are talking about is financially and financially impossible.” In fact, he is now so alarmed that he has exited all U.S. fixed income products and shorted long-term Treasuries.
Should other investors follow Tudor Jones? At first glance it may not seem so. After all, overall market conditions appear to be calm. The IMF even noted in a blog post this week that “normalized measures of (market) volatility are far below measures of geopolitical risk.”
Meanwhile, the Brookings report notes that the bid-to-market ratio in U.S. Treasury auctions (the total bid divided by the total amount of Treasury securities on offer) “has not changed much over the past few years.” Furthermore, while long-term market interest rates in the United States have risen and the yield curve has become steeper, neither interest rate levels nor term premiums appear to be extreme.
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However, there are at least three factors that threaten this peace. First, as Apollo’s Torsten Slok points out, the US government deficit is currently so high that the debt-to-GDP ratio is about to pass the 100% level and will soon reach 200%. That means it’s possible. This means the U.S. government will have to roll over $9 trillion in debt (one-third of the total) next year, increasing the size of bids by about 30 percent.
Second, bond issuance has exploded just as the footprint of price-sensitive investors has expanded. Part of that is because the Fed has stopped quantitative easing and stopped buying up bonds. But another problem is that hedge funds are buying so many bonds that they now own 11% of the market, up from 3% in 2021, the IMF said. points out.
Dealer bank holdings also increased from 2% to 5% over the period, the IMF added. This provides some reassurance as it suggests that dealers can still act as market makers during a crisis. However, the dealer footprint is much smaller than it was before 2008, and half of the potentially capricious funds. And while foreign treasury holdings recently reached an all-time high of $8.3 trillion (which seems reassuring), the third, fourth and fifth largest sources of demand are the UK, Luxembourg and Caymans. It’s from the islands. This is not very reassuring, as it is probably driven by hedge funds as well.
The third issue is policy uncertainty. If Harris becomes president, we can expect her to further promote so-called Bidennomics, which combines social spending and investment. Penn Wharton Business School estimates that this will add an additional $2 trillion to debt. But if Trump wins, all bets are off. According to Penn Wharton, the administration will pursue fiscal policies that will increase the primary deficit by at least $4 trillion while also seeking to weaken the dollar, undermining the independence of the Federal Reserve and potentially causing high inflation. He plans to introduce tariffs and immigration policies. .
That would be a risk for bonds under any circumstances. But now that the auction is expanding, it looks doubly explosive.
But some of Trump’s advisers, including Scott Bessent and Kevin Hassett, told the FT that Trump would actually pursue a completely cautious course of action. And unless Republicans win both houses of Congress, his promised trillions of dollars in fiscal stimulus will remain a pipe dream.
So the key point is that it’s difficult to use historical economic models to predict the impact a Trump victory will have on U.S. debt. And to make predictions even more difficult, as the IMF says, recent technical “yield curve changes are quite unique and could lead to uncertainty in investor asset allocation and market instability.” It means that there is a gender.
In layman’s terms, this means that the US election not only thrusts us into uncharted territory of our political economy and legal system, but also unfathomable territory for the Treasury Department. Perhaps America’s reserve currency status means it can defy fiscal gravity. But I think it would be very foolish to ignore Tudor Jones. After all, we need hedges to know what the hedge herd will do if the outcome of the election does in fact create a new crisis of confidence in the United States.
gillian.tett@ft.com
