Donald Trump’s presidential campaign frightened bond market investors around the world. Trump pledged to slash federal income taxes and spend up to $1 trillion upgrading the United States’ infrastructure. Investors worried that his victory would lead to massive federal deficits and runaway inflation, eroding the value of their holdings. The title of an April 2016 article in Forbes captured the mood: “President Donald Trump Would Destroy the Bond Market.”
The anxiety was particularly acute among foreign investors, who own around 40 percent of the $14 trillion worth of outstanding U.S. Treasury securities. When Trump hinted during the campaign that he would “make a deal” with creditors to reduce the value of their Treasuries, pundits asked whether the Chinese and Japanese central banks would begin to sour on the U.S. debt they had been stockpiling as part of their foreign exchange reserves.
To be sure, foreign confidence in U.S. Treasuries had wavered long before the 2016 election. In recent years, budget deficits, quantitative easing, and the political dramas surrounding the debt ceiling and other fiscal issues had put the creditworthiness of the U.S. federal government in doubt. Still, the prospect of Trump’s victory introduced a new dynamic altogether, leading some
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