Debt Traders Aren't Buying the Promise of 3% Growth

(Bloomberg Gadfly) -- Wall Street almost uniformly disagrees with Treasury Secretary Steven Mnuchin's assessment that 3 percent economic growth in the U.S. is "very, very doable" over the next decade.

This is important. If Mnuchin's assessment is wrong, the U.S. budget will miss out on an estimated $2 trillion of income that he and President Donald Trump are relying on to make their new tax plan work. In other words, if he's incorrect, the nation's deficit will likely expand by trillions of dollars without generating a huge economic expansion.

This week, Trump unveiled a sketchy plan to cut corporate and household taxes. The devil will be in the details, of which there are relatively few. And it's unclear whether Republicans can coalesce around a concrete plan in the near term. But Trump gave a sense of what he was aiming for.

In the wake of the announcement, Mnuchin doubled down on earlier claims that such changes would make it easy to achieve 3 percent growth. His expectations were roundly dismissed at the time, and traders and economists still aren't buying into Mnuchin's visions for economic growth. Just take a look at market moves after Trump's tax announcement on Wednesday. A gauge of expected inflation rates over the next 10 years remained well below 2 percent.  

Traders didn't exactly flee longer-term bonds in a meaningful way, which is what you'd expect if growth and inflation were going to pick up. While yields on 30-year Treasuries have risen this week, they're still below this year's average of 2.9 percent.

And the gap between these longer-term yields and two-year rates, a common proxy for growth expectations, remains near the narrowest since the end of 2007.

Meanwhile, 21 of 26 economists surveyed by Bloomberg predicted that the tax plan, if enacted, would widen the budget deficit over the next 10 years because they don't see the magic 3 percent number as being easily achievable either. The U.S. did grow at 3.1 percent annualized pace in the second quarter, according to data released on Thursday. But few out there expect that to be the norm going forward. 

Perhaps Mnuchin and Trump see something that the vast majority of Wall Street is missing. Or perhaps they're simply choosing to close their eyes to the reality that investors, debt traders and economists are looking at: an aging population with loads of debt and fundamental structural challenges to faster growth. 

The administration is going to have trouble making the math of its tax plan work. The debt market has checked its calculations and found them wanting. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

To contact the author of this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net.

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net.