Bond Rebound Hopes Dim as Trump’s Fiscal Policies Weigh on Fed Cut Prospects

Image Credit: Reuters

 

Prospects for a swift rebound in the $28 trillion U.S. government bond market appear dim as Donald Trump’s anticipated return to the White House signals a shift toward fiscal policies that may reduce the likelihood of significant Federal Reserve rate cuts.

The Fed recently cut interest rates by 25 basis points, following a prior 50 basis point cut in September, marking the start of its current rate-reduction cycle.

However, expectations of further cuts are dampened by concerns that Trump’s proposed policies—like tax reductions and tariffs—could fuel higher growth and consumer prices, which might lead the Fed to avoid aggressive cuts to prevent inflation from resurging. Tony Rodriguez, Nuveen's head of fixed income strategy, said that the Fed’s anticipated 2025 rate cuts could now be “fewer and further apart” as a result of Trump’s policies.

Treasury yields have climbed by over 70 basis points since mid-September, the largest increase in a month since the 2008 financial crisis, as Trump’s poll numbers strengthened through October. Futures data now indicates investors expect rates to fall to approximately 3.7% by late next year, still around 100 basis points higher than what was forecasted in September.

Strategists at BofA Global Research recently revised their short-term target for Treasury yields up to a range of 4.25%-4.75%. Fed Chair Jerome Powell, though refraining from commenting on potential policy changes under the new administration, suggested that higher yields likely reflect an improved economic outlook rather than inflation concerns. Inflation expectations, however, did rise, with Treasury Inflation-Protected Securities (TIPS) showing a 10-year breakeven inflation rate at 2.4%, its highest in over six months.

PIMCO’s chief investment officer, Dan Ivascyn, expressed concern about the potential for resurgent inflation to slow the Fed’s rate-cutting pace.

 A “Red Sweep”—a scenario where Republicans control both the presidency and Congress—could give Trump the leeway to push tax cuts and other economic measures more readily, with RBC’s Andrzej Skiba suggesting that significant tariffs could further discourage the Fed from cutting rates.

Despite rising Treasury yields, the stock market remains robust, as investor optimism about economic growth has helped the S&P 500 reach record highs.

Still, high yields could eventually weigh on equities if they increase too rapidly, warned Angelo Kourkafas of Edward Jones, as yields nearing or exceeding 4.5% have previously triggered pullbacks in stocks.

Some investors fear the resurgence of “bond vigilantes” who sell off government bonds to signal concerns over fiscal policy, potentially raising borrowing costs across sectors.

Trump’s economic agenda could increase national debt by an estimated $7.75 trillion over the next decade, according to the Committee for a Responsible Federal Budget. Bill Campbell of DoubleLine expressed apprehension over the country's fiscal outlook and said he is bracing for further increases in long-term yields, noting that the “Red Sweep complicates things.”

 

 

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Business Reuters"all rights reserved by the original author.