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 U.S. bond market.

• Vance’s concerns relate to the United States servicing its $35 trillion debt.

• “Are they trying to bring down the Trump presidency by sending bond prices higher?” asked JD Vance.

US vice presidential candidate J.D. Vance has expressed concern that higher interest rates could spark a “death spiral” in the US bond market, which could ultimately “destroy this country’s finances.”

Vance made the comments in a recent interview with conservative political commentator Tucker Carlson, adding that if he and Trump win the election in November, things will not be “smooth for four years” because of the risk of higher interest rates.

“I’m really concerned 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 driving up bond prices?” Vance asked.

Vance’s concern stems from the fact that America Servicing its $35 trillion debt Federal government spending was the fourth-largest in 2023 at $659 billion, up 38% from the $476 billion in 2022.

According to the Committee for a Responsible Federal Budget, a bipartisan policy think tank, government spending on net interest on the debt is on track to surpass defense and Medicare spending as the second-largest expenditure in 2024, after Social Security.

Vance fears that spending could balloon further if bond yields rise.

“We’ve called this $1.6 to $2 trillion a year in debt in this country, which is adding to the national debt. And the only thing that makes that debt really serviceable is that interest rates are still very low. Right? They’re about 4.5% right now. If interest rates go up to 8%, and you’re already spending a lot more on debt service than you are on the actual goods and services and infrastructure of your country, that could be a huge spiral,” Vance said.

As for how prices could rise to 8%, there has long been a fear that Foreign countries may dump their holdings of US Treasury bonds. All at once, creating an imbalance between supply and demand and sending interest rates higher (bond yields rise as rates fall).

Vance pointed out that Former British Prime Minister Liz Truss to resign in 2022 As an example of how this happens.

“She came in, she had a plan, and I think the Bank of England made a lot of mistakes, probably deliberately, and interest rates went through the roof and brought down her government within days,” Vance said.

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Steve Sosnick, chief strategist at Interactive Brokers, points out that this fear is not new, and that Vance is expressing concerns that have been a spectre for bond market investors for a long time.

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

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

“The consensus was that it might happen one day, but who knows when. If it does happen, it is likely to be somewhat surprising,” he added.

These same concerns have been raised in Japan for decades and have yet to be realized, Sosnik added.

As for the UK interest rate hike that hurt Truss, Sosnick explained that it was “specifically linked to the way UK pension funds dealt with interest rate risk, rather than a flight from the overall creditworthiness of UK bonds.”

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

“Such comments, if made in an analytical way, can and should be part of a responsible discussion about debt and deficits,” Sosnick said. “But when a politician from either party raises problems without offering solutions, it seems more like panic-mongering or blaming others than a search for responsible policies.”

As for where US interest rates appear to be headed in the near future, The answer is less.

Read the original article on Business Insider