The spectre of November’s presidential election has prompted an undignified outburst from Joe Biden, who labelled Donald Trump a ‘loser’ during a high-profile fundraising event in New York last night. While the personal animosity between the two men is hardly new, the timing of the tirade was impeccable from the perspective of the global bond market. As the sitting US president was delivering his expletive-laden takedown, UK 10-year gilt yields were drifting higher, reflecting a familiar anxiety: the inflationary consequences of American fiscal incontinence, regardless of which septuagenarian occupies the Oval Office.
Let us cut through the theatre. The City of London does not care about playground insults. What matters is the signal: the US is heading for another $2 trillion deficit this year, and neither candidate shows the slightest interest in fiscal rectitude. Biden’s spending spree, from the Inflation Reduction Act (which is anything but) to student loan forgiveness, has already unleashed a wave of government borrowing that has pushed US Treasury yields to multi-year highs. Trump’s tax cuts, meanwhile, are set to expire at the end of 2025, but his rhetoric suggests he would extend them, further bloating the deficit.
For UK investors, the contagion risk is palpable. Higher US yields suck capital out of London, weaken sterling, and force the Bank of England to keep rates higher for longer. The FTSE 100, which derives 70% of its earnings from overseas, may offer a temporary hedge, but the real pain will be felt in the bond market. Gilt yields have already risen 30 basis points this quarter, and the trajectory is clear: the risk premium for holding UK debt is increasing as global investors price in the spillover from Washington’s profligacy.
Biden’s outburst, then, is merely a sideshow. The real drama is unfolding in the primary dealer desks of Wall Street and the City, where traders are betting that the next president, whether Biden or Trump, will do little to curb the debt spiral. The CBO projects the US debt-to-GDP ratio will hit 116% by 2034, up from 98% today. Neither candidate has a plan to reverse this, and the markets are beginning to price in the inevitable: a fiscal crisis that will force the Fed to monetize debt, or a tax hike that will crush economic growth.
What does this mean for the pound? The currency is already under pressure, trading below $1.27 as I write. A Biden triumph would likely see a continuation of current policies, keeping the dollar strong on the back of fiscal dominance and higher yields. A Trump victory, by contrast, might trigger a short-term rally for sterling if he pursues a weaker dollar, but his penchant for trade wars and erratic policymaking would soon exacerbate capital flight. Either way, the Bank of England faces a thankless task: tighten to defend the pound and crush the housing market, or ease and watch inflation spike.
The irony is that Biden’s attack came during a fundraiser that raised $25 million for his re-election campaign. That money will be spent on advertising, much of it highlighting Trump’s legal troubles. But the markets have a longer memory. They recall that under Trump, the national debt soared by $7.8 trillion, and under Biden, it has increased by another $6 trillion. The real loser is not a man, but the principle of fiscal responsibility.
As I have written before, the bond market is the ultimate arbiter. It does not flinch at name-calling; it moves on data. And the data show that the US is on an unsustainable path. For UK investors, the message is stark: hedge your interest rate risk, diversify away from dollar assets, and prepare for a decade of higher volatility. The presidential race is a circus, but the bond market is the only ringmaster that matters.
In the meantime, the Treasury will be watching gilt yields nervously. If the spillover from US debt continues, the Chancellor’s fiscal headroom will evaporate, forcing tax rises or spending cuts ahead of the next election. That is the real legacy of the Biden-Trump contest: a future of higher taxes and lower growth, regardless of who wins. Call me cynical, but I have been in this game long enough to know that when politicians start trading insults, it is time to look at the balance sheet.
