More and more people are concerned that the United States may soon experience its own version of the UK's small-scale budget crisis, and bond strategists warn that Trump's return to the White House will bring the shadow of currency fluctuations and soaring bond yields.

President elect Trump has promised to introduce a series of measures to promote growth, including plans for tax cuts, significant tariffs, and relaxed corporate regulation.

We cannot rule out the possibility of a small-scale budget crisis in the United States and the United Kingdom

The former president's economic agenda has intensified concerns about soaring consumer prices, which strategists say could trigger significant changes in bond yields and investor behavior. They warn that a situation similar to the small budget crisis in the UK in 2022 is not impossible to occur.

Alim Remtulla, Chief Foreign Exchange Strategist at EFG International, said, "Foreign central banks and institutional investors, traditional buyers of 10-year US Treasury bonds, are slowly diversifying their investments away from US bonds because they are concerned that inflation, debt, and geopolitics will lead to currency depreciation

He continued, "Therefore, more price sensitive investors need higher yields to invest in US Treasury bonds. As the US dollar performs well, it has not yet reached crisis levels. However, some people are concerned that the US may experience a currency and yield run like the UK did in the fall of 2022

The 'mini budget crisis' in the UK refers to the turbulent period during the administrations of former Prime Minister Truss and former Finance Minister Kwarteng.

Shortly after taking office in early September 2022, Truss and Quatrain proposed a significant tax reduction plan in an unplanned fiscal statement, triggering a sharp drop in government bond prices.

After these measures were announced, the pound fell to a historic low against the dollar, and the sell-off of UK government bonds was so severe that the Bank of England implemented emergency intervention.

Truss and Kwarteng resigned due to riots after less than two months in their respective positions, and most of the measures were revoked.

Investors are starting to feel a bit nervous

Althea Spinozzi, director of fixed income strategy of Shengbao Bank, said that Trump's return to the White House is likely to reshape the US bond market "in a profound way". As the market adapts to the rising inflation expectations, the trajectory of US bond yields will rise.

Spinozzi said that the benchmark 10-year US Treasury yield may still break through the 5% mark, but he did not specify a specific timeline. He pointed out that this level plays a "magnet" role in the current economic environment.

He said, "Trump's election as president will also bring the shadow of exchange rate fluctuations. Concerns about the US fiscal situation, coupled with increased borrowing for tax cuts and spending financing, may trigger concerns about a US bond sell-off, just like the turmoil in the UK in 2022

She continued, "The unique position of the US dollar as the world's reserve currency, coupled with the unparalleled depth of the US bond market, provides a certain degree of resilience

However, the continued rise in US bond yields could potentially suppress the strength of the US dollar in the long term, especially if inflation expectations spiral out of control or global investors begin seeking alternative options, "said Spinozzi

When market participants expect consumer prices to rise or budget deficits to increase, bond yields often rise.

Paul Ashworth, Chief North American Economist at Capital Economics, said that although a US version of the UK mini budget episode may occur, the status of the US dollar as the world's reserve currency "makes it difficult to see a sudden crisis erupt

Ashworth said, "However, the so-called term premium portion of US bond yields may rise, indicating that investors are a bit nervous about digesting the increased bond supply

It's hard to see it happening

Of course, this is possible, and you cannot rule out any possibility, "said Thierry Wizman, global interest rate and currency strategist at Macquarie Group." If this happens, it is more likely to be the result of the United States' unilateral deficit spending

If every country appears equally irresponsible, then the likelihood of this happening is very low, of course, on a sustainable basis. But when all countries are experiencing high debt ratios and high deficits, this situation decreases because there is actually no choice but to produce tangible goods such as gold

When it comes to the behavior of private institutional investors, Wizman stated that in order to facilitate the US version of the UK's small-scale budget crisis, disagreements must arise.

He added, "This requires another country, another region, such as the eurozone, to replace the United States in terms of fiscal responsibility. It's hard to see.