Trump’s Election Win Sparks Shift in Bond Strategists’ Outlook
Rise in Treasury Yields Expected Amid Inflation Concerns
Donald Trump’s presidential election victory has prompted a significant change in bond strategists’ views on higher longer-dated Treasury yields, as the risk of a U.S. inflation resurgence grows. The benchmark U.S. 10-year Treasury yield has surged nearly 15 basis points since Trump’s win, driven by expectations of his proposed policies of tax cuts and tariffs.
Fiscal Debt Concerns
Estimates suggest that Trump’s policies could push up U.S. fiscal debt by $7.75 trillion over the next decade, according to the Committee for a Responsible Federal Budget. This, combined with continued resilience in U.S. economic data, has thrown a wrench into the Federal Reserve’s easing plans.
Interest Rate Futures Adjust
Interest rate futures are now fully priced for just three more quarter-point interest rate cuts by end-2025, half of what was predicted even a few weeks ago. Benchmark 10-year yields, which move inversely to prices, are up over 70 basis points cumulatively since the Fed’s large September half-percentage point rate cut.
Strategists Reassess
Nearly two-thirds of respondents in a recent Reuters survey said their overall view of longer-dated Treasury yields had materially changed since the U.S. election. “The situation is two-fold,” said Lars Mouland, chief rates strategist at Nordea. “Initially, we were skeptical about the U.S.’s need to cut rates as much as they were saying, or as much as the market was pricing… Perhaps we need to revisit the highs in rates and go even higher in the long end of the curve.”
Policy Clarity Needed
Bond strategists are seeking greater clarity around Trump’s proposed policies before making definitive calls on the future path of yields. “There are two opposing forces here for the market,” said Jabaz Mathai, head of G10 rates and FX strategy at Citi. “One is the expectation of fiscal stimulus in 2025, which keeps an upward bias to yields. However, at the same time, there is also the fact the labor market has been weakening.”
Yield Curve Expectations
Asked what was more likely for the U.S. yield curve over the coming month, 95% of survey respondents said it would steepen, with 13 predicting it would be led by longer-term yields rising faster than short-term ones, or “bear steepening”. Seven said “bull steepening” was more likely, one said “bull flattening”.
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