The wave of wild volatility seen in the debt market triggered by Donald Trump’s victory last week ended almost as quickly as it began. However, companies like BlackRock Inc., JPMorgan Chase & Co. and TCW Group Inc. have issued constant warnings that the difficult journey is likely far from over.
Trump’s return to the White House has significantly changed the outlook for the U.S. Treasury market, where October’s losses had already wiped out much of this year’s gains.
Less than two months after the Federal Reserve began cutting interest rates, Trump’s promise to cut taxes and impose big tariffs threatens to reignite inflation, increasing import costs and injecting stimulus into a country with an already strong economy.
READ MORE: More inflation, less taxes: what Trump’s victory means for the US economy
His fiscal plans – unless offset by massive spending cuts – would also cause a rise in the federal deficit. And that, in turn, has renewed doubts about whether Treasury bondholders will demand higher yields in exchange for absorbing an ever-increasing supply of new Treasuries.
One scenario is that “the debt market imposes fiscal discipline with a nasty rise in rates,” said Janet Rilling, senior portfolio manager and head of the Plus Fixed Income team at Allspring Global Investments.
She predicted the 10-year Treasury yield could return to the 5% peak reached in late 2023, about 70 basis points higher than Friday. This “was the peak of the cycle and is a reasonable level if there is a full implementation of the proposed tariffs.” Considerable uncertainty remains about the precise policies Trump will enact. Part of the potential impact has already been priced in, since speculators began betting on his victory well before the vote. Although yields on 10-year and 30-year Treasury bonds rose on Wednesday to their highest level in months, they fell again over the next two days, ending the week below where it began.
READ MORE: Dollar at R$6.00 and pressure on interest rates: the contagion of the ‘Trump trade’ to Brazil
Rising Treasury interest rates could bring volatility to global markets, especially emerging ones. The higher yield on American bonds tends to attract global investors to the paper, which would force a rise in long-term interest rates in all markets, and would also negatively affect stock markets.
But the prospect that Trump’s policies will spur growth has led investors to lower expectations about how deeply the Fed will cut rates next year, dashing hopes that US Treasuries would rise. which would mean a rise in paper yields – as political easing becomes aggressive.
READ MORE: Otaviano Canuto: Inflation, recession and other economic consequences of the Trump 2.0 government
Economists at Goldman Sachs Group Inc., Barclays Plc and JPMorgan changed their forecasts for the Fed and now predict fewer interest rate cuts. Swap deals now point to an interest rate cut to 4% by mid-2025, one percentage point above what they predicted in September. Interest rates are currently in the range of 4.5% to 4.75%.
Next week’s economic data, especially the latest reading on consumer and producer prices, could renew volatility. Fed Chairman Jerome Powell, New York Fed President John Williams and Fed Governor Christopher Waller are also scheduled to speak, providing potentially new information about their outlook.
READ MORE: ‘Trump effect’ could be worse for the world than for the United States
After the Fed cut interest rates on Thursday at its second consecutive meeting on Thursday, Powell declined to speculate on how Trump’s plans might affect the bank’s trajectory and said it was unclear. whether the recent rise in yields would continue.
But analysts widely expect the incoming Trump administration to worsen the federal deficit, which has already ballooned under President Joe Biden. The Committee for a Responsible Budget estimated last month that Trump’s plans would increase the debt by $7.75 billion more than currently projected through fiscal 2035.
“At some point, a rising deficit and debt service, all things being equal, should lead to a higher risk premium,” said Ruben Hovhannisyan, fixed income portfolio manager at TCW Group. “The question is to what extent fiscal deficits will increase under this administration.”
