After Trump won the usa presidential election, stock investors, cryptos investors, and dollar bulls were excited about his promises to relax regulations and cut taxes during the campaign. However, the economic policies Trump plans to implement upon returning to the White House may also lead to rising budget deficits and soaring inflation, which makes bonds investors uneasy.

Trump's ability to win the usa presidential election was largely due to the importance of the economy in this election. Despite strong economic growth, low unemployment rates, and a decline in inflation, voters punished the Democratic Party, which has been in power for the past four years, due to the sharp rise in the cost of living.

Official data shows that consumer prices in the usa are currently 21% higher than when Biden won the election in 2022. In the 10 key states that helped Trump return to the White House, three-quarters of the voters stated that inflation caused them moderate or severe difficulties over the past year. Most of these voters cast their ballots for the Republican Party.

However, ironically, the economic policies Trump plans to implement may exacerbate inflation. Trump has promised to impose a 10% tariff on all imported goods and a 60% tariff on goods imported from china. Analyst Dario Perkins from investment bank TS Lombard pointed out that such an increase in tariffs would raise the effective tariff on imported goods in the usa from the current 2% to around 17%, the highest level since the 1940s. According to his calculations, this would increase the consumer price index by 1.3 percentage points, equivalent to a 20% rise in oil prices. The usa's CPI year-on-year growth had already rebounded to 2.6% in October, above the Federal Reserve's 2% target.

On the other hand, stock investors do not seem too concerned. The s&p 500 index surged after Trump's victory, and although it has since retraced some gains, it remains above pre-election levels. Stock investors believe that Trump's loosening of regulations across many industries could trigger a wave of mergers and acquisitions. Meanwhile, fund managers also like Trump's idea of reducing corporate tax from 21% to 15%. Goldman sachs stated that this would increase the average eps of s&p 500 index constituent companies by 4%. The e-mini russell 2000 index, composed of small cap stocks, is also favored by investors, partly because they believe Trump's trade protectionism will benefit these small companies focused on the domestic market.

Besides the stock market, cryptos have also risen due to Trump's support for the industry. The investor enthusiasm for risky assets like stocks and cryptos is understandable, as fiscal easing and the Federal Reserve's ongoing rate-cutting cycle may further boost an already exciting economic growth rate. The International Monetary Fund (IMF) predicts that the usa's GDP will grow by 2.8% this year and by 2.2% in 2025, a growth rate far higher than that of many other western countries.

However, the cost of this growth will primarily be borne by the usa treasury. According to the nonpartisan Committee for a Responsible Federal Budget, Trump's policies may increase the usa's budget deficit by 15.5 trillion dollars over the next decade. Given that the usa's current budget deficit already exceeds 7% of GDP, such fiscal extravagance may call into question the sustainability of usa's finances.

Bond investors have undoubtedly noticed this. The benchmark 10-year U.S. Treasury yield has risen from 3.6% in September to around 4.4% now. On one hand, investors are concerned that the policies implemented by Trump will trigger a resurgence of inflation and force the Federal Reserve to maintain interest rates at a high level. On the other hand, investors hope to obtain higher returns to compensate for the risks of higher debt levels.

"Bond vigilantes" refer to those investors who push down bond prices, raise bond yields, and successfully force the government and central bank to change policies. Ed Yardeni, a senior strategist on Wall Street who first coined the term "bond vigilantes" in the 1980s, stated, "Trump's high level of support gives him tremendous influence not only in the USA but globally. It is reasonable for the bond market to be concerned about continued fiscal policy easing in the context of a significantly high budget deficit." Ed Yardeni indicated that the "bond vigilantes" are dominating the market and they may push the 10-year U.S. Treasury yield to 5%, thereby influencing the Fed's subsequent interest rate cut actions.

The well-known economist Nouriel Roubini, known as "Dr. Doom," pointed out that if Trump continues his large-scale spending plans after returning to the White House, it will bring about the return of the "bond vigilantes," which may suppress "radical" economic policies. Roubini stated: "Trump is concerned about market discipline; if bond yields rise and the stock market adjusts, the bond vigilantes will say your policies are unsustainable—then economic advisors will warn him not to adopt radical populist economic policies but to be more moderate."

Despite optimists believing that the U.S. Treasury market can withstand such shocks, as the dollar ensures strong foreign demand for U.S. Treasury securities and other assets, the issue is that rising bond yields weaken the rationale for investors to hold stocks. If held to maturity, bonds are undoubtedly a safer asset than stocks, and high bond returns can attract investors away from equities. Especially now that benchmark stock indexes like the S&P 500 index are at high valuation levels, as higher bond yields imply a higher discount rate for future cash flows, which will reduce the present value of stocks.

Of course, the eloquent Trump may violate his campaign promises after entering the White House, or choose not to fulfill his commitments in the event of poor economic and market performance. However, if Trump acts according to his previous commitments, the next target of the "Trump trade" may be to short the stocks that have performed strongly so far.

Editor/rice