JD Vance says he’s worried about a “death spiral” in the US bond market. Here’s what he’s talking about.

• JD Vance recently warned of a “death spiral” in the US bond market.

• Vance’s concerns are about the US servicing its $35 trillion debt.

• “Are they trying to bring down Trump’s presidency by raising bond rates?” asked JD Vance.

Vice-presidential candidate JD Vance is concerned that rising interest rates will trigger a “death spiral” in the US bond market that could “ultimately bring down the finances of this country.”

Vance made the comments in a recent interview with conservative political commentator Tucker Carlson, adding that if he and Trump win the November election, it won’t be “smooth sailing for four years” because of the risk of rising interest rates .

“I’m really worried about the bond markets, the international investors, the people who got rich from globalization, the people who got rich from shipping our manufacturing base to China, the people who got rich from a lot of wars, are they trying to bring down the Trump presidency by raising bond rates?” Vance asked.

Vance’s concern stems from the fact that America’s servicing of its $35 billion pile was the fourth-largest federal government expense in 2023, at $659 billion, up 38 percent from the 476 of billions of dollars paid in 2022.

According to the Committee for a Responsible Federal Budget, a bipartisan think tank, government spending on net interest on the debt is on track to surpass government spending on defense, with Medicare becoming the second largest spender in 2024, just behind Social Security.

Vance worries that spending could rise even more if the bonds yield.

“We’ve called it $1.6 trillion to $2 trillion in debt every year in this country that adds to the national debt. And the only thing that makes this true is that interest rates are still pretty low. Isn’t that right? It’s about 4.5% Right now, if interest rates go up to 8% and you’re actually spending a lot more on paying off debt than on goods, services and infrastructure for your country, that can become a huge spiral.” Vance said.

As for how rates would rise to 8%, there has long been fear that foreign countries could suddenly lose their holdings of US Treasuries, triggering a supply-demand imbalance and driving rates higher interest rates (bond yields rise as prices fall) .

Vance pointed to the 2022 resignation of former British Prime Minister Liz Truss as an example of how this could play out.

“She came in, she had a plan, and the Bank of England I think made a lot of mistakes, maybe on purpose, interest rates went out of whack and brought down the government in a matter of days,” Vance said.

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Interactive Brokers chief strategist Steve Sosnick notes that this fear isn’t new, and Vance echoes concerns that have acted like a madman for bond investors for a long time.

“This has been a constant, underlying concern for bond investors for years,” Sosnick told Business Insider.

Sosnick said in his own recent conversations with bond investors, discussions “ultimately turned to when long-term bond yields might reflect concerns about our ability to service debt.”

He added: “The consensus was, one day, maybe it could come up; but who knows when. Although, if it does happen, it would probably be quite sudden.”

Sosnick said the same concerns have been raised in Japan for decades and have yet to materialize.

As for the UK interest rate rise affecting Liz Truss, it was “specific to the way UK pension funds have managed their rate risks, not an escape from the global solvency of UK gilts “, explained Sosnick.

Ultimately, Vance’s concern about the U.S. debt and the potential for higher interest rates is “not trivial,” Sosnick said, but when it comes from a politician of any party, investors should take it with a grain of salt.

“Comments like these, if done analytically, can and should be part of a responsible discussion about debt and deficits. But when a politician of any party raises issues without offering solutions, it reveals itself as scaremongering or blame-shifting rather than a search for those responsible. policies,” Sosnick said.

As for where US interest rates seem headed in the near future, the answer is lower.

Read the original article on Business Insider