Trump's Comments on U.S. Debt Seen as Non-Starter by Bond Market

Donald Trump, Political Rhetoric and the 2016 Race
  • `Stupid and ridiculous' says CRT Capital's David Ader
  • `Irresponsible talk' says Silvercrest's Patrick Chovanec

When Donald Trump suggested he might renegotiate terms on more than $19 trillion of debt owed by the U.S., bond traders didn’t blink.

Trump, the presumptive Republican nominee for president, said in an interview with CNBC Thursday that if the economy were in a prolonged slump, he might use his business skills to reduce America’s debt burden by pushing creditors to accept write-downs on their government holdings.

Since the founding of the country Treasury secretaries have been unwavering in their commitment to always make good on government obligations, an assurance that’s helped make U.S. debt a haven from risk around the world. A default would put that status in jeopardy, sinking the value of the dollar and sending yields surging, according to David Ader, head of government-bond strategy at CRT Capital Group LLC. Growth could stall as borrowing costs for holders of mortgages and other consumer loans -- which are tied to government debt yields, spiked.

“This is stupid and ridiculous and never going to happen,” Ader said from Stamford, Connecticut. “But it’s not impossible that he could be president, and could try all the seemingly ludicrous and impossible things he’s talked about. You can’t just dismiss it when the guy’s got his finger on the button, so to speak.”

Benchmark Debt

Treasuries rose Thursday, with the benchmark 10-year yield falling 0.03 percentage point to 1.75 percent, a sign bond traders weren’t taking his comments as a serious threat to their investments. Treasuries were on track for a weekly gain Friday after a report showed the U.S. economy added fewer jobs than forecast in April, bolstering speculation that the Federal Reserve is in no rush to raise interest rates.

“I would borrow, knowing that if the economy crashed, you could make a deal,” Trump said in a CNBC interview.

Treasury market participants aren’t immune to concern about the national debt, even as they remain unshaken by Trump’s comments. When partisan gridlock brought the government to the brink of default in August 2011, one-month Treasury bill rates climbed to a 29-month high and stocks fell as S&P Global Ratings cut the nation’s credit rating.

“This is irresponsible talk,” says Patrick Chovanec, New York-based chief strategist for Silvercrest Asset Management Group. “If there was a belief that he would actually do it, I don’t know how markets would react. Clearly, they’re dismissing it at the moment as simply rhetoric, and not particularly well thought-out rhetoric.”

The U.S. has never defaulted on its obligations in modern history. Already, some on Trump’s team are walking back his statement.

“The government has to honor its debts,” Trump finance chairman Steven Mnuchin said Friday on CNBC.

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