Market Volatility Ahead: Trump’s Fiscal Plans Spark Bond Market Concerns
The US Treasury market is bracing for a tumultuous ride as Donald Trump’s presidential victory sparks concerns over inflation, tariffs, and a surging federal budget deficit. Despite a brief respite, bond market experts warn that the bumpy ride is far from over.
Fiscal Discipline at Stake
Janet Rilling, senior portfolio manager at Allspring Global Investments, predicts that the 10-year Treasury yield could rise back to 5%, a level last seen in late 2023, if Trump’s proposed tariffs are fully implemented. This would mark a significant increase from current levels, prompting bondholders to demand higher yields in response to an influx of new Treasuries.
Growth Expectations Drive Rate Forecasts
Traders are paring back expectations for Fed rate cuts next year, citing Trump’s growth-spurring policies. Economists at Goldman Sachs, Barclays, and JPMorgan have revised their Fed forecasts, anticipating fewer rate reductions. Swaps traders now predict the Fed’s benchmark rate will reach 4% by mid-2025, a full percentage point higher than previously expected.
Economic Data and Fed Insights Ahead
This week’s economic data, including consumer and producer prices, may trigger renewed volatility. Fed Chair Jerome Powell, New York Fed President John Williams, and Fed Governor Christopher Waller are set to speak, providing fresh insights into their outlooks. Federal Reserve Bank of Minneapolis President Neel Kashkari notes that the US economy remains strong, but the Fed still has work to do to combat inflation.
Bond Market Caution
Rick Rieder, BlackRock’s chief investment officer for global fixed income, advises investors to lock in elevated yields on short-term bonds, but exercise caution when venturing into longer-term debt. JPMorgan’s Bob Michele warns that 10-year Treasury yields may eventually climb back to 5% after Trump takes office, while Amundi SA’s Vincent Mortier flags this level as a “real alert” that could impact the equity market.
Deficit Concerns Loom
Analysts expect the next Trump administration to worsen the federal deficit, which has already swelled under President Joe Biden. The Committee for a Responsible Budget estimates that Trump’s plans would increase the debt by $7.75 trillion through fiscal year 2035. This raises concerns about the bond market’s ability to absorb the increased supply of new Treasuries, potentially leading to higher yields.
What to Watch
Economic data releases, Fed speeches, and auctions will be closely monitored in the coming week. Key indicators include the Consumer Price Index, Producer Price Index, and retail sales. Fed officials’ comments will provide valuable insights into their policy outlook, while auction results will reveal market sentiment.
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