Government Bond Market Faces Uncertainty as Trump’s Return Looms
The $28-trillion U.S. government bond market is bracing for a potential downturn as Donald Trump’s return to the White House is expected to bring fiscally expansive policies that could limit the Federal Reserve’s ability to cut interest rates.
Fiscal Policies Could Temper Rate Cuts
The Fed’s recent 25-basis-point rate cut has been overshadowed by expectations that Trump’s economic platform, including tax cuts and tariffs, will lead to faster growth and higher consumer prices. This could make the Fed cautious about cutting rates too deeply next year, denting hopes of a rebound in bonds after a weeks-long selloff.
Treasury Yields Surge
Treasury yields have surged by over 70 basis points since mid-September, coinciding with Trump’s improving standing in polls and betting markets throughout October. Fed funds futures now expect rates to decline to about 3.7% by the end of next year, 100 basis points higher than previously expected.
Inflation Expectations Rise
Consumer prices have notched their smallest rise in over 3-1/2 years, but inflation expectations as measured by Treasury Inflation-Protected Securities (TIPS) have surged this week. The 10-year breakeven inflation rate has risen to 2.4%, its highest in over six months.
Bond Market Strategists Weigh In
Dan Ivascyn, group chief investment officer at PIMCO, is worried about rebounding inflation forcing the Fed to slow or pause rate cuts. Andrzej Skiba, head of BlueBay U.S. Fixed Income at RBC Global Asset Management, expects long-term bonds to sell off further if tariffs are rolled out extensively.
Impact on Stock Market
Rising Treasury yields have had little effect on the stock market so far, but could cause trouble if they rise too far or too quickly. Higher yields offer investment competition for equities while raising the cost of capital for companies and consumers.
Watchful Eyes on 4.5%
Ten-year Treasury yields stood at 4.34% late on Thursday, and strategists are watching the 4.5% level closely. When yields have neared or exceeded 4.5% in the past, it has triggered pullbacks in equity markets.
Bond Vigilantes and Fiscal Profile
Some fear a return of bond vigilantes could tighten financial conditions excessively, as higher government bond yields push up borrowing costs for everything from mortgages to credit cards. Trump’s tax and spending plans could increase the debt by $7.75 trillion over the next decade, according to a recent estimate.
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