If Trump Returns, US Deficit Increases by 1 Quadrillion, Treasury Yields Surge

Bank of Korea New York Office Analysis
Fiscal Deficit to Increase by $7.5 Trillion if Trump Elected
10-Year US Treasury Yield Expected to Rise by 0.43%P
Greater Negative Impact on Our Economy Than Harris

Former President Donald Trump campaigning in Prescott Valley, Arizona, on the 13th (local time). [Image source=Yonhap News]

In the upcoming U.S. presidential election just one week away, projections indicate that if former President Donald Trump is elected, the U.S. fiscal deficit could increase by more than 10 quadrillion Korean won, and government bond yields are expected to soar. With heightened interest rate volatility, South Korea's financial markets are also likely to face negative impacts.

According to a report titled "U.S. Fiscal Deficit and U.S. Treasury Yield Trends" from the Bank of Korea's New York office on the 29th, the possibility of a Red Sweep?where Trump wins and the Republican Party controls both the House and Senate?is gaining traction locally. This has raised concerns about an expanding fiscal deficit and a continuing rise in Treasury yields.

U.S. Fiscal Deficit Could Increase by $7.5 Trillion if Trump Wins

The Bank of Korea cited data from the U.S. nonprofit organization, the Committee for a Responsible Federal Budget (CRFB), estimating that Trump's campaign promises would increase the U.S. fiscal deficit by $7.5 trillion (approximately 1,391 trillion Korean won) over the next decade. In contrast, Vice President Kamala Harris's proposals are expected to increase the deficit by $3.5 trillion (4,848 trillion Korean won) during the same period.

The main driver of the fiscal deficit expansion is tax cuts. Harris proposes extending tax cuts (TCJA) only for households earning less than $400,000 annually, whereas Trump promises tax and corporate tax cuts for all households, creating a significant gap between the two. The TCJA (Tax Cuts and Jobs Act) enacted in 2017 lowered the federal corporate tax rate from a range of 15?35% to a flat 21%, reduced individual income tax rates by 2?3 percentage points across income brackets, and adjusted various deductions and exemptions.

The U.S. government debt-to-GDP ratio is projected to rise from 97% in 2023 to 125% in 2035 if current fiscal spending laws remain unchanged. If Harris's proposals are realized, it could reach 133%, and if Trump's proposals come to fruition, it could climb to 142%.

10-Year U.S. Treasury Yield Expected to Rise by 0.43 Percentage Points

The expansion of the U.S. fiscal deficit is expected to increase volatility in Treasury yields, impacting South Korea's financial markets as well. The Bank of Korea's New York office analyzed that historically, for every 1 percentage point increase in the U.S. government debt ratio, the 10-year U.S. Treasury yield has risen by 2?3 basis points (1 bp = 0.01%).

Accordingly, if Trump wins and the Republicans control both chambers, the 10-year Treasury yield could rise by an additional 43 basis points over the next decade. For Harris, the increase is estimated at 20 basis points. The market expects that the upward pressure on yields will be fully reflected within two weeks after the election results are confirmed. A sharp rise in U.S. Treasury yields would also affect South Korea's bond market, influencing exchange rates and market interest rates.

However, even if Trump is elected, if the Republicans fail to control both the House and Senate, increasing fiscal spending without congressional agreement would be difficult, limiting the impact of the fiscal deficit on Treasury yields. Some analysts suggest that fiscal spending constraints could reduce the growth-promoting effects of fiscal policy, potentially exerting downward pressure on interest rates.

Additionally, a Trump administration under a divided Congress is likely to implement tariff and immigration policies without congressional approval, which could raise concerns about stagflation (inflation combined with economic slowdown), potentially leading to a flattening of the yield curve as the spread between short- and long-term interest rates narrows.

A Bank of Korea New York office official stated, "Concerns about the Red Sweep scenario have recently increased, causing a tilt toward rising interest rates. Interest rate volatility may heighten depending on shifts in the election landscape until the results are finalized, and if the outcome differs from market expectations, a sharp reversal cannot be ruled out."

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