In 2012 I wrote a book called “The Coming Bond Market Collapse”, in that book I predicted that the bond market would begin to collapse by the end of 2016. Clearly, this prediction has started to come true. However, in all candor, I never dreamed that the Ten-year Treasury yield would plummet to 1.3%. Neither did I ever imagine that over thirteen trillion dollars’ worth of global sovereign bonds would have a negative yield, as was the case this past summer. 

The Book’s assumption was that the bursting of the bond bubble would be caused by a change in global central banks’ monetary policy or through the eventual achievement of their inflation targets. At this juncture—at least in the U.S.–we have both. The Ten-year Treasury note has risen 80% since July based on both the return of inflation and the Fed’s desire to raise interest rates.

This begs the question:how high could interest rates climb and what is the interest rate that will break the Trump rally’s back?

Back in 2007, before anyone knew what the phrase Quantitative Easing meant, nominal GDP was around 5%, our National Debt was $5.1 trillion (64% of GDP) and the Ten- year was 5%–there is a strong correlation between nominal GDP and the 10-year note. Therefore, without any central bank-manipulation of long-term interest rates, it would be logical to conclude that the rate would rise back towards the 5% level as long as Mr. Trump can produce real growth of 3% and inflation around 2%. But, given today’s $20 trillion of National Debt, which is north of 105% of GDP, and the condition of soaring annual deficits, it would be prudent for bond investors to require an even higher yield than 5%.

The U.S. budget deficit has started to rise due to unfavorable demographics and an economy that is already suffering from a debt-disabled condition. The deficit for fiscal 2016, at $587 billion, was 34% higher than 2015. And the projected fiscal deficit for 2017 is $616 billion dollars, but that is before we factor in the new administration’s tax cut and spending plans.