ROI-Trump rate hopes and CBO budget math don't chime: Mike Dolan

By Mike Dolan

LONDON, Feb 12 (Reuters) - President Donald Trump is insisting - and not for the first time - that U.S. interest rates should be the lowest in the world. Bond markets eyeing the latest long-term budget math beg to differ.

Trump's dogged insistence on slashing interest rates is increasingly looking a little farcical. While his appointees to the Federal Reserve - including new Fed Chair nominee Kevin Warsh - may well oblige the president by pushing for some additional easing, markets doubt there's more than 60 basis points of further rate cuts left in the whole cycle through the end of Trump's term, with 3% likely the floor for the foreseeable future.

Fed hawks seem determined to hold the line - and for good reason. Inflation is still above target, GDP is growing well above trend, the unemployment rate is more than a point below its 25-year average, investment spending is soaring and financial conditions are the loosest in years.

But 3% is clearly not what the president has in mind.

Trump said in an interview on Tuesday that Americans should be paying "the lowest interest rates in the world". He made a similar statement on social media last month.

A glance at central bank interest rates around the world gives you a sense of what that might mean if applied to Fed policy. The Bank of Japan's key interest rate is just 0.75%, Swiss rates are at zero and the European Central Bank's policy rate is 2%.

Taken literally, that implies the White House thinks the United States should be running negative interest rates.

Perhaps reminded of that, Trump appeared to clarify his extreme take in a social media post on Wednesday, suggesting what he really meant was that U.S. bond market borrowing rates should be the lowest in the world to reflect U.S. economic strength and creditworthiness.

At least that's what it seemed like he was saying.

"The United States of America should be paying MUCH LESS on its Borrowings (BONDS!)," Trump said on Truth Social. "We are again the strongest Country in the World, and should therefore be paying the LOWEST INTEREST RATE, by far."

But pressuring a $30 trillion bond market to comply with your wishes is even trickier than forcing the Fed's hand.

Checking a list of comparable countries - the other G7 powers and China, for example - shows that only Britain currently pays more for 10-year borrowing than Uncle Sam.

SCARY BUDGET MATH

For investors and creditors around the world who help determine countries' long-term borrowing costs, three main elements are at play. The first is the base cost of central bank borrowing, the second is the outlook for inflation and the exchange rate over time and the third is the basic supply-and-demand dynamic for the debt given estimates of long-term creditworthiness.

Given those considerations, the prospect of the U.S. central bank pushing rates below those of all other developed economies has already been dismissed by markets, even with all the noise about Fed independence and political appointees. Relatively hot inflation helps explain that, as does a perceived White House preference for a weaker dollar over time, which doesn't exactly endear overseas bond investors to Treasuries.

But the big issue is the trajectory of the U.S. budget and the mounting government debt pile.

If you want to know why markets are so uncomfortable, look no further than the non-partisan Congressional Budget Office's latest long-term outlook on U.S. government finances published on Wednesday.

The CBO said the U.S. budget deficit for fiscal year 2026 - Trump's first full fiscal year in office - will remain at a whopping 5.8% of GDP. While that's where it was in fiscal year 2025, the report said current policy settings mean it would average 6.1% over the next decade and reach 6.7% in 2036.

Registering annual budget gaps of that scale over a decade would be explosive for the country's debt burden, especially given that these projections assume no recession and unemployment below 5% throughout. Investors will inevitably start to wonder what an unforeseen shock or sudden economic downturn might do to that math.

For many years, investor nerves about America's fiscal woes have been soothed by the thought that the Fed would just use its balance sheet to hoover up bonds in the event of a crisis, as it has done over the past two decades. But Trump just nominated a new Fed Chair who has expressed his opposition to using the Fed balance sheet in that way - and who even advocates running down the current one much further.

SQUARING THE CIRCLE

For the record, the CBO does not assume the United States will be paying the lowest bond borrowing rates on the planet and is instead forecasting a 4.3% 10-year Treasury yield over the next 10 years. That's higher than the 4.1% level seen today.

Given the way the rest of the debt calculation pans out, 4.3% might actually be a tad conservative.

Cumulative deficits over the next decade are now expected to be about 6%, or $1.4 trillion, higher than the CBO estimated last year. The organization said Trump's tariff rises won't offset the combined impact of his tax cut and spending bill last year and the effect of falling immigration.

All told, the debt-to-GDP ratio is on course to almost double in dollar terms to $56 trillion by 2036 - 120% of GDP compared with 99% last year. In that process, it would top its World War Two-related 1946 peak of 106% within five years.

Can anything square this circle for the administration?

The White House's main bone of contention would likely be the CBO's assumptions of relatively modest real annual GDP growth of 1.8% over the decade. The administration reckons it will be about twice that.

But let's assume growth does run at a sustained 3-4% clip over the next 10 years. In that scenario, the Fed is not going to be delivering the lowest interest rates on the planet. If it did, the dollar would almost certainly plummet and Treasury bonds would likely follow - not exactly the script one would expect for the "strongest Country in the World".

The opinions expressed here are those of the author, a columnist for Reuters.

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