Many clients of financial advisors are increasingly concerned about the United States government running a $1.8 trillion deficit during a strong economic expansion—and neither presidential candidate has even bothered to address what looks like an unsustainable state of affairs.
Would the so-called bond market vigilantes—the giant financial institutions—stage a buyer’s strike and try to bend the U.S. Treasury to their will? That question was put to Sonal Desai, Franklin Templeton’s CIO for fixed income, on a webcast entitled “From the Polls to Your Portfolio: Navigating the U.S. Presidential Election” that the firm conducted early this morning.
Desai maintained that market conditions were still not there yet. Before bond buyers strike, yields are likely to drift higher, she said. But reform is likely to be driven by yields drifting higher, she added.
In the unlikely event of a Democratic sweep in the November election, Desai said there might be a short-term “relief rally” in the hope that higher taxes would raise revenues and narrow the deficit. But she didn’t see a significant likelihood of that outcome.
At present, the bond market is sitting in a relatively optimistic place, even if it isn’t as oblivious as politicians. “The market is still somewhat optimistic about rate cuts” and the reduced odds of recession, she told listeners.
Desai also said that concern over a future President Trump interfering with the Federal Reserve’s independence was “somewhat overstated.” While Trump has indicated he will “speak out” about interest rates, he has also said he shouldn’t be able to “dictate” them.
Desai pointed out that several times a year Fed Chair Jay Powell gets “beaten up” by Republicans or Democrats in Congress. “That’s a time-honored tradition,” she said.