Nobel winner Joseph Stiglitz has a warning for bond investors
U.S. long-term borrowing costs came under pressure this week — but the bond market may still not be fully factoring in the fiscal challenge facing the world’s biggest economy, according to Nobel-winning economist Joseph Stiglitz. “I think we’ll be able to finance the U.S. government,” Stiglitz told CNBC’s Steve Sedgwick on Friday at the annual Ambrosetti forum in Italy. He nevertheless added that a “real indicator of the market not thinking things are being well managed” was reflected in a calculation of real interest rates projected forward 10 years, which has risen from 2% to around 2.5%. “Let me tell you, I agree with that perspective, and I think markets are slow to react,” Stiglitz said. “They haven’t fully taken on board, for instance, [U.S. President Donald] Trump’s claim that tariff revenues are going to finance the deficit. What [he] doesn’t understand is it takes a while for firms to readjust their supply chains, and so, in the short run, you have your old supply chain, and you pay your tariffs at the high rate.” “But, you know, it’s like gravity. Firms are going to find the way they can [to] import goods at the lowest tariff, and as soon as that happens, tariffs go down,” Stiglitz continued. “So I think the U.S. financial position will be worse than these straightforward projections we see for the moment, [with] tariff revenue quite high.” Deficit concerns Global long-dated bond yields have eased over the second half of this week after hitting a series of notable highs on Tuesday . That included the U.S. 30-year Treasury briefly touching 5%, after markets were spooked by a ruling from the federal appeals court that most of Trump’s tariffs on imports are illegal. The decision raised the prospect of Washington having to refund billions of dollars raised from the levies. Concerns over the U.S. fiscal trajectory have increased this year as several analyses pointed to Trump’s budget plans adding trillions to the deficit over the next decade, at a time when it is already more than 6% of gross domestic product (GDP). Jason Furman, former chair of the Council of Economic Advisers under President Barack Obama, told CNBC on Friday that the Trump administration had taken a high deficit path left by its predecessors and had “basically locked it in.” “They passed a law that cut taxes and cut spending, then they did tariffs. All of that is roughly fiscally neutral. But remember, fiscally neutral says that we’re okay with a budget deficit of about 6% of GDP, rising to 7% of GDP, we’re okay with debt continuing to rise as a share of GDP,” Furman said in an interview at the Ambrosetti forum. Furman said it would be overstating the case to say this would “cripple” the U.S. economy going forward, but that there would be negative effects including higher mortgage rates and a more difficult environment for businesses to invest. No one knows exactly where the tipping point would come for higher U.S. borrowing to tip into crisis territory, he noted. This year, moves in the Treasury market have often been detached from flights out of the stock market and into “safe haven” assets, typically a time when U.S. bonds hold greater appeal. U.S. yields — which move inversely to prices — sharply increased during the April market sell-off sparked by Trump’s initial tariff announcement, and on several subsequent updates in which tariff policy was more forceful than expected. Bond investors “want their cake and to be able to eat it too,” Jonathan Mondillo, global head of fixed income at Aberdeen, told CNBC’s “Squawk Box Europe” on Thursday. “Before you saw those revenues coming in from tariffs, it was all about how this is going to slow down growth, how it’s going to increase deficit spending, and there’s going to be a need for increased issuance in bills, bonds and notes.” “I think it’s shifted towards where we’re starting to see some of the revenues come in, hopefully they use that to pay down debt more longer term. That being said, I still think there is a tremendous amount of concern in the bond market, especially at the long end of U.S. Treasuries,” he said. EU ‘got a bad deal’ Discussing the recent U.S.-European Union trade agreement in the same Friday interview with CNBC, Stiglitz said Brussels got a “bad deal” given the levels of trade between the two partners . Economists and European officials have equally expressed concerns that the EU came out at a disadvantage in the agreement, even if it avoided a worst-case 30% tariff rate. “[The EU] may be making the best of a bad situation, but it’s not just about trade,” Stiglitz said. “Europe should have gotten the better deal. Europe got a bad deal, absolutely. But what was this about? Defense. Europe is at war. They know they’re at war. The U.S. knows that it’s at war. Europe has not gotten the defense capacity to fight on its own.” “Everybody should have been aware that the U.S. was not a reliable partner back in 2017, when Trump came to power first, but they didn’t take on board that lesson. And this is the best deal they could get,” he said.
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