The ‘big beautiful’ budget vs the bond market

Katie Martin (0:09)

Donald Trump's budget is making its way through the US political system, but markets don't like the look of it that much. The package from the White House, the one big beautiful bill to give its full name, and yes, I am being serious, has received the usual hype from the president because it delivers on some of his big campaign promises. But the Democratic Party says this all takes from the poor and gives to the rich. Plus, the bill manages to crank the US debt to GDP ratio up to extraordinary highs. Today on the show, we're asking, will the bond markets stomach all this? Really? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist here at FDHQ in very rainy London. I'm not complaining. It's good for the garden. And I'm joined all the way down the line from New York City by the big fella, Robert Armstrong, High Priest of the Unhedged newsletter.

Robert Armstrong (1:07)

Nothing but sunshine here in New York City.

Katie Martin (1:10)

Rob, would you say you are big and beautiful?

Robert Armstrong (1:13)

I am big. I'm increasingly big, according to my tailor.

Katie Martin (1:18)

I'll tell you what else you are. You're like famous now for the taco trade that you made up. Trump always chickens out trade.

Robert Armstrong (1:27)

I mean, acronyms are very powerful, especially when they remind people of foodstuffs. That is what I've learned from this experience.

Katie Martin (1:34)

I mean, it's all over the financial TV. It's in all the notes I get from the investment banks. And the late, this is a very quick detour, but the latest taco trade was Trump said, oh, I'm going to put a 50% tariff on the EU. And then he immediately Tacoed. Chickened out on that.

Robert Armstrong (1:51)

Ordered the tacos. Yeah. But it's relevant. I mean, we're talking about bonds today. The bond market liked that news, right? So that's an offset. But we should talk about the budget as this is a budget show, Katie. God.

Katie Martin (2:03)

Let's talk about the budget. Donald Trump is not going to chicken out of the budget.

Robert Armstrong (2:07)

No.

Katie Martin (2:07)

Please tell me, token American, what is in it?

Robert Armstrong (2:11)

Well, I guess the context here is that in general, we're markets people. And in general, markets like it when the US government spends money that it has to borrow. This kind of brings money into the financial system in a broad way. I mean, there's some nice points about how it raises the money and so forth. But basically, deficit spending makes markets happy. Up to a point. The question is, have we reached that point where fiscal largesse, I don't know if I'm pronouncing largesse correctly here. Largesse. Fiscal largesse by the US government may have reached a point where it no longer pleases markets, specifically the bond market, and starts to spook them a little bit. And once the bond market gets spooked, you know who gets spooked next? The equity market. And then it's nothing but trouble. Cats and dogs living together. So basically, the budget is more deficit-y than the market was expecting. And as a result, bonds, that is treasury bonds, that is the full faith and credit obligations of the United States, have fallen in price and their yields have risen. And as the famous story goes, everyone is afraid of the bond market.

Katie Martin (3:34)

Especially me. Now, so when you're talking about how deficit-y this whole thing is, another exciting new word you've made up there.

Robert Armstrong (3:42)

Yes.

Katie Martin (3:42)

So independent bodies reckon that the bill will add, count them, $3.3 trillion to US debt over the next 10 years. Quite a lot of dollars. That will mean that the debt to GDP ratio of the US will go up from something like 100% to something like 125%, which will be well in excess of the previous high, which was in the aftermath of the Second World War. These are huge numbers and I kind of don't get it because I thought Trump was all about cutting spending. Can you make this make sense to Brits, please?

Robert Armstrong (4:20)

No, I will not even try to make it make sense. But there is some form here on the part of, if not Trump, then the Republican Party. The stand, and actually the heck with it, both parties. Both parties like to talk about kind of fiscal sanity when the other party is in charge. But when you are in charge, fiscal sanity is something to be done later. And by the way, there is a reason that both parties act this way, which is that broadly speaking, the market and the world's savers have put up with it perfectly happily. If the world is willing to just charge the United States a couple of percent to own its debt, why not keep cranking it up? We like money. You're going to give me cheap money? We'll take it. So the question is, what we're talking about on this show is whether that stops being true and you throw around ratios like it's X percent of GDP, the debt is X percent of GDP, but nobody really knows where the ceiling is.