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Bond Market Faces Risky Path as Traders Regroup from Wild Week

The bond market is facing significant volatility following Trump's election victory. Rising inflation concerns and fiscal policies could impact Treasury yields and bondholder sentiment.

Bond Market Faces Risky Path as Traders Regroup From Wild Week

The bond market selloff triggered by Donald Trump’s presidential victory last week ended almost as quickly as it began. However, analysts at firms like BlackRock Inc., JPMorgan Chase & Co., and TCW Group Inc. have issued repeated warnings that the bumpy ride is far from over.

Trump’s return to the White House has significantly upended the outlook for Treasury yields, which were already struggling in October after losses wiped out much of the year’s gains. Less than two months after the Federal Reserve started pulling back interest rates from a more than two-decade high, Trump's fiscal policies—including tax cuts and large tariffs—are now threatening to rekindle inflation by raising import costs and pouring stimulus into an already strong economy.

These policies could exacerbate instability in the bond market, especially if they lead to an increased federal deficit. Higher tariffs, if implemented, are likely to fuel inflation, and this will force bondholders to demand higher yields as compensation for the risk of a rising supply of government bonds.

Trump’s Economic Policies May Push Bond Yields Higher

In this volatile environment, bond market analysts are predicting that Treasury yields could climb back to the peak of 5% reached in late 2023, especially if Trump moves forward with large fiscal stimulus measures. Janet Rilling, senior portfolio manager at Allspring Global Investments, highlighted that fiscal policies may push yields higher, particularly if they lead to significant inflation.

“There remains considerable uncertainty about the precise policies Trump will enact, and some of the potential impact has already been priced in,” Rilling said. Speculators had already started positioning themselves for Trump’s victory ahead of the election, but the full effects of his fiscal policies are still unknown.

Federal Reserve's Shift in Interest Rate Expectations and Bond Market Impact

Following the election, traders have adjusted their expectations for how much the Federal Reserve will cut rates next year. While the Fed had previously been expected to lower rates aggressively to boost economic activity, Trump's potential tax cuts and stimulus plans have led traders to reassess these expectations.

Economists from Goldman Sachs, Barclays, and JPMorgan now forecast fewer interest rate cuts than previously predicted. Current market pricing suggests that the Federal Reserve will reduce rates to about 4% by mid-2025, a full percentage point higher than anticipated in September. This adjustment indicates growing confidence in the economy despite possible inflationary pressures.

Will the Bond Market Weather This Storm?

After the Fed’s recent meeting on Thursday, analysts are questioning whether the recent surge in Treasury yields will continue. While the market showed volatility after Trump’s election, with 10- and 30-year Treasury yields rising to their highest levels in months, these rates then retreated in the following days. As analysts point out, the full impact of Trump’s fiscal policies on Treasury yields remains uncertain.

However, the potential for higher yields in the short term has raised concerns for long-term bondholders. Firms like BlackRock and JPMorgan have recommended locking in yields on short-term bonds to avoid the volatility in longer-term debt markets.

Rising Federal Deficit Could Impact Bond Market Sentiment

Trump’s fiscal plans to cut taxes and increase spending could significantly worsen the federal budget deficit, which has already ballooned under President Biden’s administration. According to the Committee for a Responsible Budget, Trump’s policies could add $7.75 trillion more to the national debt by 2035. This has led to fears that an increasing deficit will push the bond market into higher yields.

As portfolio managers note, “At some point, an increasing deficit and debt servicing, all things equal, should lead to a higher yield premium.” In other words, the bond market might demand higher yields to compensate for the increased risk that comes with an expanding federal deficit.

Conclusion: Bond Market Faces an Uncertain Future

The bond market is at a crossroads as Trump’s policies begin to take shape. The potential for higher inflation, increasing deficits, and continued fiscal stimulus could drive yields higher in the coming months. While there is some uncertainty about how these policies will unfold, the bond market’s response will likely shape the broader economy for years to come.

With the likelihood of more fiscal stimulus, higher tariffs, and an expanding deficit, analysts predict that investors should prepare for more volatility. The full impact of Trump’s policies on the bond market remains to be seen, but the current outlook suggests that the market will need to adjust to higher rates and greater risks in the near future.