Trump’s Dream of German Borrowing Costs Faces One Key Obstacle

(Bloomberg) -- As U.S. President Donald Trump laments missing out on Germany’s ability to borrow for free, he might consider whether his country’s excessive bond supply is part of the problem.

For two days, Trump has bemoaned the fact that Europe’s largest economy is effectively being paid to borrow for the next 30 years, while the U.S. has to pay investors a rate of around 2.1%. Though Trump has focused his ire on the Federal Reserve, at least part of reason behind the current yield differentials is down to the glut of supply in U.S. debt.

The U.S. budget shortfall is set to widen to $1 trillion by the 2020 fiscal year, according to Congressional Budget Office forecast this week. By comparison, Germany has posted a budget surplus for the past five years. German Chancellor Angela Merkel’s hands are tied by strict laws that limit public spending, even though she can borrow for free.

That will prevent U.S. yields getting anywhere close to Germany’s, according to Danske Bank A/S. While the Fed may undertake a series of interest-rate cuts in response to building headwinds for the U.S. economy, rates on 10-year bonds will bottom out at 1%, a far cry from the minus 0.6% on their German equivalents, the bank said.

“If you run a huge deficit, investors demand a higher yield,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske. “Anything else would be absurd.”

Trump’s missives on Twitter come ahead of a speech by Fed Chair Jerome Powell on Friday that bond investors will watch to gauge the extent of any further U.S. rate cuts. The prospect of U.S. and European stimulus is driving a sovereign debt rally that has taken the global stock of negative-yielding debt to a record above $16 trillion, though none is in the U.S.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, William Shaw, Neil Chatterjee

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