Britain’s ‘mini-budget’ disaster should be a warning to the US

Fears are growing that the US could be experiencing its own version of a “mini-budget” crisis, with bond strategists warning that Donald Trump’s return to the White House brings a wave of currency volatility and rising bond yields.

President-elect Trump has promised to deliver a litany of pro-growth initiatives, including tax cuts, steep tariffs, and plans to roll back corporate regulations.

The economic agenda of the former president has ratcheted up concerns about the increase in consumer prices, which strategically said could trigger significant changes in bond yields and investor behavior.

He warned a scenario depicting Britain’s mini-budget crisis in 2022 was out of the question.

“Foreign central banks and institutional investors, the traditional buyers of US 10y Treasurys, are slowly diversifying away from Treasurys due to debasement concerns linked to concerns about inflation, debt, and geopolitics,” Alim Remtulla, head of foreign exchange strategy at EFG International, said. told CNBC by email, with reference to 10-year US Treasurys.

“As a result, investors who are more price sensitive need higher returns to invest in Treasuries. This is not yet at a crisis level, because (the US dollar) is superior,” he said. “But there are concerns that the U.S. could experience a currency and yield crisis similar to that experienced by the U.K. in the fall of 2022.”

Britain’s mini-budget crisis marks a period of turmoil under former Prime Minister Liz Truss and former Finance Minister Kwasi Kwarteng.

Shortly after taking office in early September 2022, Truss and Kwarteng caused a crash in government bond prices when they presented plans for large tax cuts in an unscheduled fiscal announcement.

The British pound fell to record lows against the US dollar after the measures were announced, while the sell-off in UK government bonds was so heavy that the Bank of England launched an emergency intervention.

Truss and Kwarteng resigned amid unrest after less than two months in their respective offices, and the majority of the measures were reversed.

Althea Spinozzi, head of fixed income strategy at Saxo Bank, said Trump’s return to the White House has the potential to reshape the US bond market “in a profound way,” with the trajectory of Treasury yields set to rise as markets adjust to higher inflation expectations. .

The benchmark US10-year Treasury could breach the 5% mark, Spinozzi said, without specifying a timeline, noting that this level is a “magnet” in the current economic environment.

“Trump’s presidency also brings the burden of currency volatility. Concerns about the fiscal position of the US, supported by increased debt to finance tax cuts and spending, may cause fear of selling in Treasuries, reflecting the turmoil seen in the UK in 2022,” Spinozzi said.

“The unique position of the US dollar as the world’s reserve currency and the unparalleled breadth of financial markets provide a level of resilience,” he continued.

“That said, a sustained increase could weaken the dollar over time, especially if inflation expectations become unanchored or global investors start looking for alternatives,” Spinozzi said.

The 10-year Treasury yield traded more than 4 basis points higher at 4.424% on Wednesday morning. Yields and prices move in the opposite direction, and one basis point is equal to 0.01%.

Bond yields tend to rise when market participants expect higher consumer prices or large budget deficits.

Paul Ashworth, chief economist of North America at Capital Economics, told CNBC that while the US version of Britain’s mini-budget episode is possible, the dollar’s position as the world’s reserve currency “makes it difficult to see a sudden crisis developing.”

“But the premium component of Treasury yields may increase, indicating that investors are a little nervous about swallowing additional sources of bonds,” said Ashworth.

“There’s definitely a prospect of that happening. You can’t predict any of this,” Thierry Wizman, global interest rate and currency strategist at Macquarie Group, told CNBC via video call.

“If this happens, it is likely to be as a result of the US deciding on its own about spending the deficit,” Wizman said.

“If every country is seen as irresponsible, then the chances of this happening are low, certainly on a sustainable basis. But when all countries have high debt ratios and high deficits,‘It’s less likely because there’s nothing to walk away from, except for physical assets like gold.”

Referring to the behavior of private institutional investors, Wizman said that there was a difference in easing the mini-budget crisis in the UK.

“You will take other countries, other regions like the euro area supplanting the US with regard to fiscal responsibility. That is difficult to see happening,” he added.

– CNBC’s Jenni Reid contributed to this report.