Of Trump and Treasuries – the story is no story

It is a testament to, er, something, that a man with Donald Trump’s track record becomes the presumed Republican nominee for President, says the things Trump says and has little discernible impact on financial markets. Trump, no stranger to bankruptcy court, first indicated last week that “I would borrow knowing that if the economy crashed, you could make a deal” and then moved on Monday to reassure that, after all, the U.S. can’t default because it can “print the money.” Treasury markets, where investors trade what are supposed to be the world’s safest securities, were singularly unmoved. Do investors not believe Trump, not believe in Trump or simply don’t believe he’ll make much difference to current policy even if successful in his bid for the presidency? The answer is probably a mixture of all three, with a bit of the perverse incentives through which investment advisors are paid thrown in just for good measure. For his part, Trump swears up and down his comments about “a deal” weren’t indicating a partial or soft default, though his explanation fails to make clear the economic benefit of a deal to swap older debt for new, especially one that was voluntary on both sides. I cannot recall any modern major party presumptive nominee who ever said anything that might possibly be construed as meaning the U.S. wouldn’t honour debts in full or keep the dollar strong. In the world I thought I lived in, investors in U.S. government debt trade the prospect of higher returns elsewhere for unrivalled liquidity and security. Donald Trump on the other side of the table when things turn bad is not what these investors sign on for. Mind you, Donald Trump in the White House is very likely not what they will get, at least if the very preliminary polls are to be believed. So perhaps they don’t believe in Trump’s chances and are dismissing his debt management expertise along with his many other plans few believe will come to pass. He may, after all, not mean what he says. Who could possibly know? Would you like to bet? “Trump’s stated economic policies are at times conflicting and often changing, which also makes it difficult for investors to interpret the possible consequences,” Libby Cantrill of bond investment giant PIMCO wrote in a note to clients. “What are investors supposed to do with a candidate whose economic ideology is divergent from that of his party’s, not to mention often inconsistent and fluid?” Perhaps the most optimistic explanation is that investors have faith that U.S. institutions are strong enough to withstand a President Trump, or take comfort in the constraints the law puts on the power of the president. Not paid to be right As usual, to understand how financial markets react to events we should recall how participants are paid and under what terms of engagement they operate. The vast majority of investment managers, the people who make the decisions about buying and selling Treasuries and other assets, aren’t paid to be “right” but paid to beat the market or their peers. The risk for them isn’t, strictly speaking, the risk of loss but the risk of underperformance. Losses come and go, but underperformers lose assets under management and sometimes get fired. So taking a big bet on your ability to anticipate not only the American electorate but one Donald Trump is perhaps not a great idea for you personally or for your clients. None of which is to say that markets won’t begin to react to Trump as we get closer to the election and get more information about his prospects and plans. Remember too that during the debt-ceiling crisis of 2011 prices of Treasuries rose, partly due to the fear a government shutdown or default would be bad for the economy and partly because, in a world of imperfect credits, the U.S. remained, and remains, the best. Stock markets, by the way, won’t like it so much. Jeffrey Gundlach, CEO of DoubleLine, and as such a power in the bond markets, has said, variously, that Donald Trump will win the election and that his policies on trade would actually benefit Treasuries, which will rally in price on expectations that economic growth would be hit. Still it is hard to under-sell exactly how strange this whole situation is, which is perhaps another reason for how calm things remain. Extrapolating from economic policies is one thing, no longer trusting the good faith of the heretofore most creditworthy borrower in the world is quite another.