Bond Rates To Derail US Economy?

May 14, 2018

Could rising bond rates derail the US economy?

Donald Trump has taken a lot of credit for the performance of the American economy since he first became president and has used the spectre of continued economic growth to fund his plans for significant tax cuts in the coming year.

The promised infrastructure boom has also led to significant stock rises. However, the rates that the US government pays on its significant debt pile have started to rise over the last year or so and this could easily derail the government’s spending plans. In this article, we’ll examine what that would mean for the markets and the American economy in general.

Which Stocks Would Be Hit Hardest?

The stocks of construction companies and manufacturers of construction equipment would be the first to suffer in the event of a pullback in Trump’s infrastructure spending plans. This would then ripple out to hit airlines, logistics companies and others that are relying on improved infrastructure to grow their businesses in the coming years.

The Longer-term Effect

If the impact of higher bond rates on US government spending is so significant that parts of Trump’s tax-cutting agenda cannot be delivered, then expect the impact to become bigger.

Ironically, if the tax cuts have only benefitted the rich, as Trump constantly claims they have not, then the impact on the US economy from any pullback would not be as large as richer people tend to hold onto money rather than pumping it straight back into the economy. Such a move could also play into the results of the US elections in 2018 and 2020, leading to power changing hands in Washington and an entirely different set of economic policies being pursued in the coming years.

Higher bond rates are an issue that have so far had little attention from the mainstream US media and most political commentators. However, if their upward trajectory continues in the coming months then it is likely to become a significant talking point as the country’s national debt pile is so large that even a small rise will significantly increase the cost of servicing America’s debt, leading to higher taxes or reduced government spending.