Vice Presidential candidate JD Vance has expressed deep concerns over the risk of rising interest rates potentially triggering a "death spiral" in the U.S. bond market, which he believes could severely damage the nation’s financial stability.
Speaking with conservative commentator Tucker Carlson, Vance emphasized that even if he and Donald Trump win the upcoming election, their administration will face significant economic headwinds due to the volatility in interest rates.
“I’m really worried about whether bond markets and international investors—those who have benefited from globalization, outsourcing our manufacturing to China, and profiting from ongoing conflicts—might attempt to undermine the Trump presidency by driving up bond rates,” Vance said.
Vance’s alarm is rooted in the fact that servicing the nation’s $35 trillion debt load has become one of the largest line items in the federal budget. In 2023, the U.S. spent $659 billion on debt interest payments, a 38% increase from $476 billion the previous year. According to the Committee for a Responsible Federal Budget, government interest payments are poised to overtake defense and Medicare spending in 2024, becoming the second-largest federal expense behind Social Security.
The rapid escalation in debt service costs could grow even larger if bond yields rise, Vance warned. “We’re adding between $1.6 to $2 trillion in debt each year, and the only thing making that manageable right now is that interest rates are relatively low—around 4.5%. But if rates jump to 8%, we’ll be spending far more on interest payments than on actual services and infrastructure for the country. That could spiral out of control quickly.”
A key concern for Vance is the possibility of foreign governments dumping their U.S. Treasury holdings, which could trigger a spike in interest rates. As bond prices fall, yields rise, and a sudden influx of Treasurys on the market could disrupt the delicate supply-demand balance.
Vance pointed to the 2022 collapse of former UK Prime Minister Liz Truss’s government as a cautionary example of how this could happen. “She had a plan, but interest rates skyrocketed after a series of missteps by the Bank of England, and her government collapsed in days,” Vance said, suggesting that the U.S. could face a similar scenario if investors lose confidence in the bond market.
Steve Sosnick, chief strategist at Interactive Brokers, echoed some of Vance’s concerns but added important context. “This fear has been present among bond investors for years,” Sosnick told Business Insider. “In conversations I’ve had with bond investors recently, the topic eventually turns to when long bond yields might reflect concerns about our ability to service the debt.”
Sosnick noted that while fears of a bond market collapse are real, they haven’t materialized in a meaningful way, citing Japan’s experience with its own high levels of debt and interest rate concerns that have persisted for decades without catastrophic outcomes.
Regarding Liz Truss’s downfall, Sosnick clarified that the crisis was not driven by a loss of confidence in UK bonds themselves but rather by issues with how British pension funds managed their rate risks. “It was more a technical issue than a reflection of the creditworthiness of UK gilts,” he explained.
While Vance’s warnings about the U.S. debt and potential for rising interest rates are serious, Sosnick urged investors to be cautious when political figures raise alarms without offering solutions. “When these concerns are raised in an analytical context, they should be part of a responsible discussion about debt and deficits. But when politicians from either party bring up these problems without outlining concrete solutions, it can come across as fearmongering or deflecting blame.”
Sosnick added that while Vance’s concerns aren’t baseless, the likelihood of a sudden spike in U.S. interest rates in the near term appears low. Instead, many experts are anticipating rates to trend lower in the coming months as the economy adjusts and inflationary pressures ease.
For wealth advisors and RIAs, understanding the dynamics of rising interest rates, bond yields, and the federal debt is critical to navigating the current market environment. As interest rates fluctuate, the bond market’s response will significantly impact portfolio strategies, particularly for clients with fixed-income exposure. Advisors should monitor developments closely, particularly around federal monetary policy and global investor sentiment, as these factors will directly influence the interest rate environment.
Given the potential for market volatility, advisors may want to consider diversifying bond portfolios, increasing allocations to shorter-duration bonds, or exploring alternatives like inflation-protected securities. Moreover, RIAs should maintain a dialogue with clients about the broader implications of rising government debt and interest rates, offering reassurance while also positioning portfolios to mitigate potential risks.
The challenge for wealth advisors is not just predicting whether rates will spike but preparing portfolios to withstand various interest rate scenarios. That means keeping an eye on macroeconomic indicators such as inflation trends, GDP growth, and central bank policy shifts. Regular communication with clients, including educating them on the nuances of bond yields, debt servicing costs, and how these factors affect long-term financial health, is crucial in maintaining client confidence in uncertain times.
In conclusion, while JD Vance’s warnings about the U.S. bond market and soaring interest rates resonate with longstanding concerns in the financial community, wealth advisors must approach these fears with a balanced perspective. By staying informed, proactively managing risk, and maintaining a clear, client-focused strategy, RIAs can help navigate the complexities of an evolving economic landscape.
