The Impact of Widening U.S. Budget Deficits and Inflationary Trade Policies on Bonds
As the Nov. 5 presidential election approaches, bond giant PIMCO warns of potential challenges for U.S. government bonds due to widening budget deficits and inflationary trade policies. Despite the current advantages of a central bank in easing mode, PIMCO predicts a soft landing for the U.S. economy with inflation easing and solid economic activity. However, a worse-than-expected slowdown could lead to more aggressive interest rate cuts by the Federal Reserve.
PIMCO recommends intermediate-duration bonds like five-year Treasury securities for their potential value gains from lower interest rates. On the other hand, longer-duration bonds may face uncertainty due to U.S. fiscal and trade policies, which could push long-term yields higher over time. The Committee for a Responsible Federal Budget estimates that both Republican candidate Donald Trump and Vice President Kamala Harris could significantly increase U.S. deficits in the next decade.
Regardless of the election outcome, PIMCO believes that high government deficits will be detrimental to bonds, leading to a steepening of the U.S. yield curve. Additionally, trade policies under a Trump presidency could worsen the outlook for bonds by increasing tariffs on imports, potentially fueling inflation and hindering economic growth.
The potential for disruptive trade policies is seen as greater under a second term for Trump, while Harris is expected to continue a more targeted approach if she wins. This could pose challenges for the U.S. central bank in achieving its 2% inflation target, as higher short-run inflation from tariffs may impact consumer costs and inflation expectations.
In summary, investors should be cautious about the impact of widening budget deficits and inflationary trade policies on U.S. government bonds. The outcome of the presidential election could further influence bond performance, making it essential to stay informed and adjust investment strategies accordingly.