This time does feel a little ‘different’

It’s remarkable that the current bond market weakness began within a day or two of the Federal Reserve’s historic decision to lower rates on September 18th. 

Doubtless the US election polls (remember those?) around that time started to point to an increasing chance of a second Trump Presidency. And now we know, and Inauguration Day rapidly approaches. 

Uncertainty and associated volatility abounds wherever one looks. The US is a basket case of uncertainty.

Will Trump cause chaos, or unleash (eventually) what he will no doubt call ‘the greatest economy the world has ever seen’? 

And never mind the increased debt required to unleash the boom, and the servicing of that debt. US national debt stands over $36 trillion. At a projected $892 billion in 2024, interest payments on the federal debt represent 3.1% of GDP. (1)

Essentially, bond markets, but especially the US Treasury market which exerts an enormous gravitational pull on the rest of global debt markets, are saying that the Fed is stimulating an economy that is to all intent and purposes booming, fuelled by relentless consumer spending (hard to fathom, but there it is, the evidence is clear), and a more nebulous AI-inspired / make America great again optimism. The stand out ‘AI’ headline so far this year, Microsoft’s announcement to spend $80 billion this year building out data centres, underscores the intense capital requirements of artificial intelligence. That’s 80 billion - one company, albeit a big one.

Closer to home, with interest payments that already exceed £100bn a year, there is a plausible scenario where the UK Gilts market comes seriously unstuck. This would ripple across pensions, mortgages and of course equities, not to mention fiscal policy and government budgets. 

Market movements so far would be sufficient to more than erase the headroom against the Chancellor’s current much heralded budget rule, with the Treasury now on track to break the rule. 

Analysts fear that if the sell-off in the Gilts market persists, the Chancellor could be forced to go further in a bid to underpin fiscal credibility, namely, tax rises and front-loaded spending restraint, otherwise known as austerity.

Anxious times indeed, even allowing for the inevitable and often observed ‘recency bias’, that today’s crisis always seems the worst ever.

This time does feel a little ‘different’. 

Arcturus Wealth Management

Sunday 12 January, 2025

(1) https://econofact.org/the-rising-burden-of-u-s-government-debt