By Davide Barbuscia
NEW YORK (Reuters) – Investors are weighing whether Donald Trump might turn to unconventional ideas to try to bring the ballooning U.S. debt under control, after the president insisted he won’t cut popular health and retirement benefits.
Some of Trump’s advisers have espoused unorthodox ideas in recent months, including forcing foreign governments to swap Treasuries for cheaper bonds in order to reduce interest payments and selling residency cards to rich foreigners at $5 million a pop.
With many officials and economists saying that U.S. debt is on an unsustainable path, investors in U.S. bonds, currency and equities markets are starting to pay more attention to these ideas.
U.S. debt stands at $36 trillion, or more than 120% of annual economic output (GDP), and is rising fast as the government spends more than it raises in taxes. Last year, the U.S. budget deficit topped 6% of GDP – though Treasury Secretary Scott Bessent has said he wants to halve that.
Trump’s new administration has launched aggressive moves to cut federal spending through Elon Musk’s Department of Government Efficiency (DOGE). And it has announced plans to raise additional revenue by imposing heavy tariffs on imports from trade partners including China, Mexico and Canada.
More than half a dozen investors and economists told Reuters the outcome of those efforts to close the deficit remained unclear. And none of the other outside-the-box ideas would have enough impact to bring the fiscal situation under control, they added.
Indeed, a forced debt swap with foreign governments could undermine U.S. credit worthiness and upset the global financial system, they said – torpedoeing Bessent’s aim of sharply lowering the yield on benchmark 10-year U.S. Treasuries, which underpins borrowing costs across the economy.
“The prospect for manipulating a long-term yield through some kind of financial or political engineering operation is very limited,” said Larry Summers, an economist who served as Treasury Secretary under President Bill Clinton, a Democrat.
An official with the White House’s National Economic Council – the principal group of economic advisors to the president – said that “out-of-the-box thinking is exactly what is required,” blaming the previous Democratic administration for adding to deficits and causing inflation.
Trump, the official said, had moved quickly to “restore fiscal sanity.” The official said a fall in long-term U.S. interest rates in recent weeks was a sign of market confidence in Trump’s policies. As further evidence, the official pointed to a decline in the term premium, which measures what investors charge for holding debt for a longer period of time. RECOVERY IN U.S. BOND PRICES After Trump’s election in November, investors had sold off government bonds amid concerns that his policies – including tax cuts and tariffs – would cause the U.S. deficit to worsen and put the economy on an inflationary path. But since mid-January, a few days before Trump’s inauguration, the benchmark 10-year Treasury yields have fallen dramatically. The 10-year yield, which moves inversely to price, has dropped to around 4.2%.
The term premium, which in part reflects investors’ feelings about the future size of the debt, has also declined, but it remains firmly in positive territory after being negative for years.
Some investors, however, argue that yields have fallen not because of optimism around the U.S. fiscal trajectory but because Trump’s policies have increased economic uncertainty – hitting consumer and business confidence, and leading to talk of slower or negative growth.
Those worries are showing in stock prices as well, some investors said. The U.S. benchmark S&P 500 has fallen over 4% since Trump’s return to the White House on January 20 against a roughly 1.3% decline for an MSCI index of stocks in more than 40 other countries. Niladri Mukherjee, chief investment officer at TIAA Wealth Management, said a “spike in policy uncertainty” may be leading to a soft patch in the economy.
“Campaign promises are one thing, but the devil is in the details when it comes to policy-making,” he added.
Whatever the reason for recent market moves, the Trump administration needs to persuade investors its measures to bring debt under control are working. Otherwise, investor disappointment could prompt a resumption of the bond selloff, raising borrowing costs and hindering the administration’s ability to pursue its agenda.
“The price of bonds, like the price of any financial asset, is primarily determined over time by fundamentals, and the budget deficit is by far the most important fundamental,” Summers said.
MAR-A-LAGO ACCORD
In a November paper, economist Stephen Miran, whom Trump has picked to chair his Council of Economic Advisors, raised the possibility that Trump could use the threat of tariffs and the lure of U.S. security support to persuade foreign governments to swap their Treasury holdings for lower-cost century bonds.
Miran, who served as an adviser to the Treasury during Trump’s first term, wrote the paper before his nomination while working as a senior strategist at Hudson Bay Capital Management, an investment management firm. He is yet to be confirmed.
The idea was part of a series of measures to increase U.S. competitiveness that Miran called the ‘Mar-a-Lago Accord’, after Trump’s Florida residence. Miran declined to comment to Reuters, pending his confirmation.
Such a debt swap could yield roughly $100 billion in interest costs per year, estimated Julian Brigden, president of Macro Intelligence 2 Partners, a research firm.
While significant, this would be a fraction of the debt burden. Debt held by the public is expected to climb to $52 trillion by 2035 from $30 trillion this year, according to the latest Congressional Budget Office forecasts.
But worries about further forced debt swaps could result in selling pressure on Treasuries, driving yields higher, some investors and economists said – increasing the risk associated with the world’s safest asset.
“Perhaps they could bring political pressure on some people to buy bonds,” Summers said. “But it’s likely to make other people nervous about holding an asset that is supported by political pressure, which tends not to work forever.”
The NEC official said Miran’s paper discusses a wide variety of potential options without advocating for any of them, and only Trump could say what he’d adopt.
James Bianco, the head of Chicago-based advisory firm Bianco Research, said Trump has already adopted some measures indicated by Miran, including the use of tariffs as leverage for security agreements and creating a sovereign wealth fund.
“I started to realize a lot of the things that are in that paper are happening,” Bianco said.
EXPECT THE UNEXPECTED
Another idea floated by the administration is the “gold card” program, which Trump and Commerce Secretary Howard Lutnick have said could help to shrink the deficit. Trump has said the residency plan has the potential to raise trillions of dollars and help pay off U.S. debt.
The projections have been met with some skepticism. Some immigration and wealth advisers say it is unlikely to trigger a major inflow of wealthy global investors because it would open up their global income to U.S. taxes.
An additional subject of market speculation is the idea that the administration could try to make use of the country’s gold stockpile.
At current market prices, the gold held in Fort Knox, Kentucky and other locations would be worth about $758 billion, but it is valued at only $11 billion on the Federal Reserve’s balance sheet due to a 1973 law that set its price, TD Securities, an investment bank, said in a February 20 note.
Trump and Musk have said they want to confirm that the gold has not been stolen from the vaults. Bessent has talked about monetizing “the asset side of the U.S. balance sheet for the American people,” but said that a gold revaluation was not what he had in mind.
Ed Mills, an analyst at Raymond James, a financial services firm, said Trump might draw on his experience as a real estate developer in any attempt to overhaul the country’s debt.
“Trump has spent his life reorganizing and refinancing the debt of the Trump Organization,” Mills said.
Trump, by his own telling, nearly went bankrupt in 1990 and was forced to ask dozens of banks to change the terms on their loans and forgive some of his debts — an event he’s held up as proof of his negotiating skills and shrewd thinking.
“With Donald Trump you have to expect the unexpected,” Mills said.
(Reporting by Davide Barbuscia; Editing by Paritosh Bansal and Daniel Flynn)
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