Analysis-US fiscal strain looms as key challenge for newly elected Trump

By Davide Barbuscia

NEW YORK (Reuters) – Newly elected U.S. President Donald Trump will face fiscal challenges that could threaten the country’s standing in the global debt markets, hurting investor appetite for the nation’s debt securities, and pushing government borrowing costs higher.

U.S. budget deficits and government debt levels were largely projected to surge under either candidate in the Nov. 5 election, according to several estimates, although Democrat Kamala Harris was expected to add less debt than Trump.

The prospect of rising government debt levels as Trump’s odds improved in recent weeks helped send U.S. government bond yields higher, as many believe his trade and tax policies will reignite inflation and worsen the U.S. fiscal picture. On Wednesday, as results showed Trump winning the election, yields jumped higher with some citing bond vigilantes, referring to investors dumping government debt over worries about rising deficits. The benchmark 10-year Treasury yield rose as high as 4.479%.

“We see a Trump presidency as bearish for yields, given increased deficits and higher tariffs,” said Spencer Hakimian, CEO of macro hedge fund Tolou Capital Management.

A key hurdle for the new administration will likely be the reinstatement of the federal debt ceiling on Jan. 2, which was suspended in 2023 following protracted negotiations with Congress.

Washington regularly sets a limit on federal borrowing, which must be approved by a majority of lawmakers. Debt limit disputes in the past have pushed the country to the brink of default and dented its credit rating – a scenario that could be on the cards again in the event of a divided government. Republicans won a U.S. Senate majority, but neither party appeared to have an edge in the fight for control of the House of Representatives where Republicans currently hold a narrow majority.

Barring a quick resolution, the Treasury Department will likely need to use its cash reserves and so-called extraordinary measures – or an array of accounting maneuvers – to fund the government until the so-called X date, when it will no longer be able to pay all its bills. Some analysts estimate that could be in the second half of next year.

Naomi Fink, global strategist at Nikko Asset Management, expects bond volatility around the debt ceiling negotiations even if a default is averted.

“It is less probable that the U.S. actually defaults than that the market prices in the probability of an extreme event at some point, which could mean a volatility shock even in the absence of default,” she said, speaking before the election.


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