Economic Uncertainty Looms as Trump’s Policies Take Center Stage
The world’s largest asset managers, overseeing a staggering $20 trillion, are bracing for continued price pressures in the wake of President Donald Trump’s immigration and trade policies. This scenario is likely to cast a shadow over the bond market throughout the year.
Vanguard Sounds the Alarm
Vanguard, the second-largest asset manager with over $10 trillion in assets, has expressed concerns about inflation in its first-quarter fixed income outlook report. The company expects core measures of price pressures to remain stuck above the Federal Reserve’s 2% target, potentially exceeding 2.5% for most of 2025. Trade and immigration policies implemented by the Trump administration could further complicate the picture, according to Vanguard’s active fixed income team.
Uncertainty Reigns
Investors are eagerly awaiting more announcements from the new administration about policies on tariffs, immigration, and tax cuts. Trump’s recent vows to impose tariffs on the European Union, China, Canada, and Mexico have sent ripples through the market. The impact of these policies on inflation and growth will depend on their scope and sequencing, according to Libby Cantrill and Allison Boxer of PIMCO.
Growth and Inflation: A Delicate Balance
In a scenario where tariffs increase and budget deficits widen due to expected tax cuts, growth could decelerate this year while inflation rises. PIMCO expects modestly higher core inflation of around 20 to 40 basis points in the U.S. in 2025, with negative growth effects of a similar size. Vanguard also warns about the potentially negative-growth impact of tariffs, depending on their size and distribution.
Rising Yields and Bond Market Volatility
U.S. government bond yields have surged over the past few months, partly in anticipation of pro-growth policies under the Trump administration. Benchmark 10-year yields declined marginally after Trump’s inauguration, but remain about 100 basis points higher than in September. BlackRock, the world’s largest asset manager, expects yields will keep rising due to a combination of higher inflation and rising government debt levels.
A Fragile Equilibrium
BlackRock’s Investment Institute notes that the current combination of sticky inflation, higher policy rates, and high and rising debt levels represents a fragile equilibrium supporting investor demand for long-term bonds. As the economic landscape continues to shift, investors will be closely watching the impact of Trump’s policies on the bond market and beyond.
Leave a Reply