The deficit's sky-high. Why the world's top hedge fund isn't worried in the slightest.

MW The deficit's sky-high. Why the world's top hedge fund isn't worried in the slightest.

By Steve Goldstein

Bridgewater says it's the combination of private-sector and public debt that matters to the bond market

One of the big questions surrounding Trump 2.0 is how the administration's policies, including planned corporate tax cuts and the extension of his first administration's tax reductions, may impact an already-burgeoning budget deficit.

One of the world's top investors says there is nothing to worry about.

Bridgewater Associates, the world's hedge fund by assets under management, says the impact on bond yields depends not just on the government deficit but that of private-sector companies as well.

"This is because public and private debt (both as an asset and as a source of spending) are reasonably fungible, so what matters for markets and the economy is how much collective new credit is being created, and the incentive and desire of investors to buy it," says a piece co-authored by Larry Cofsky, Bridgewater's co-head of fixed income research, that was dated Nov. 21 but disseminated by the firm on Monday.

And right now, total credit creation just isn't anything to write home about - it's about average as increased public borrowing has been offset by muted private-sector borrowing, after a surge during the COVID pandemic.

And that's reflected in markets. "In terms of supply and demand for debt, the risk premiums on the long end look about average, with no market signs that economic or debt limits are currently being hit. This contrasts with other times when abnormally high total borrowing has driven yields and risk premiums up (via higher supply, higher inflation, or both), such as during the 1980s, the [2008 global financial crisis], or the height of COVID," says the Bridgewater team. That's also the case when looking at the developed world more broadly - total borrowing is back to around its 30-year average.

The Bridgewater team, like many, expect a similar if not worsening government budget picture. "In the U.S., with the new administration likely pushing to extend the Trump tax cuts but not expand government spending much beyond the level it is today, public sector issuance is likely to remain roughly constant if not rise a bit to somewhere in the range of 7-8% of GDP," they say. That's being cleared by higher yields, which in turn have kept down private-sector borrowing.

They say deficits could be a problem, at a certain point. "If the Trump administration really pushes to the point where the private sector can't be depressed enough to offset the higher deficit, then we will start to get problems. But we do see constraints on fiscal spending-inflation remains a constraint on policy makers, particularly after the impact it had on the last campaign. And there is not much appetite, even from Republicans, for much higher deficits," they say.

The Bridgewater team says the incentive to buy bonds is higher than it has been. For one, unlevered investors - think pension funds, endowments or insurers -- generally remain under-allocated to bonds relative to longer-term targets, they say. Also, yields are at attractive levels, and diversifying to stocks if there's a growth slowdown. Furthermore, banks have not been buying many bonds but could step up purchases as the the yield curve continues to steepen, which could happen if the Fed continues to ease, they say.

The market

U.S. stock index futures (ES00) (NQ00) were lower early Tuesday, after eight consecutive losses for the Dow Jones Industrial Average DJIA but new records for the Nasdaq Composite COMP. The yield on the 10-year Treasury BX:TMUBMUSD10Y increased.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              6074.08    0.65%   2.66%  27.34%  27.38% 
   Nasdaq Composite                                                     20,173.89  2.22%   7.35%  34.39%  35.35% 
   10-year Treasury                                                     4.425      15.00   1.60   54.41   57.67 
   Gold                                                                 2654.1     -1.08%  1.45%  28.11%  30.03% 
   Oil                                                                  70.04      2.77%   1.39%  -1.81%  -3.91% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

November retail sales data is set for release Tuesday, as the Federal Reserve's two-day interest-rate-setting meeting starts. Industrial production and home-builder confidence also are set for release.

China is planning a record 4% fiscal deficit-to-GDP ratio for next year as it retains a 5% GDP growth target, according to Reuters.

Tesla $(TSLA)$ got more Wall Street support as Mizuho Securities USA lifted its rating to outperform and its price target to $515.

Nucor $(NUE)$ warned late Monday of a decline in earnings from lower steel prices.

EBay $(EBAY)$ late Monday announced a new $3 billion stock buyback.

Ukraine says it killed a senior Russian general, who it accused of ordering chemical weapons use.

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The chart

It's not just the Dow - the equal-weight version of the S&P 500 RSP is in a rut, even as the headline index has slightly improved over that time period. Not everyone's worried. "Overall, I don't think the breadth of weakness matters just yet to the U.S. stock market. Technology has successfully managed to turn higher in a way that's been helpful to the market indices, despite underperformance in many various sectors," said Mark Newton, head of technical strategy at Fundstrat.

Top tickers

Here were the most active stock market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   PLTR    Palantir Technologies 
   AVGO    Broadcom 
   MSTR    MicroStrategy 
   TNXP    Tonix Pharmaceutical 
   SMCI    Super Micro Computer 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 

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-Steve Goldstein

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December 17, 2024 06:30 ET (11:30 GMT)

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