The chances of a quick recovery in the $28-trillion U.S. bond market are diminishing as Donald Trump’s potential return to the White House could bring more expansive fiscal policies, which may limit the Federal Reserve’s ability to cut rates further. Although the Fed recently lowered rates, expectations of tax cuts and tariffs under Trump’s policies could drive growth and inflation, likely slowing the Fed’s rate cuts. Treasury yields have risen sharply since mid-September, reflecting shifts in market sentiment as Trump’s standing improves in polls
Investors now expect the Fed’s rate to decrease to around 3.7% by the end of next year, up from prior projections in September by 100 basis points. BofA Global Research raised its near-term target for Treasury yields to a 4.25%-4.75% range. Fed Chair Jerome Powell suggested the rise in yields reflects economic optimism more than inflation concerns, as consumer prices showed minimal increases. Meanwhile, inflation expectations rose, and PIMCO’s Dan Ivascyn expressed concern about a resurgence in inflation affecting rate cuts, especially under potential Republican-led economic policies.
Andrzej Skiba of RBC Global Asset Management anticipates further declines in long-term bonds, suggesting that potential tariffs could keep the Fed from cutting rates. Similarly, Rick Rieder from BlackRock cautions against expecting aggressive rate cuts in 2025, noting that bonds offer reliable income rather than benefiting solely from falling rates. Meanwhile, rising Treasury yields have had limited stock market impact, though a sharp yield increase could pressure equities. Higher yields may also challenge markets, potentially inviting bond vigilantes to tighten financial conditions by raising borrowing costs.
Trump’s proposed tax and spending policies could add $7.75 trillion to the national debt over the next decade, per the Committee for a Responsible Federal Budget. Bill Campbell, a portfolio manager at DoubleLine, expressed concerns about the country’s fiscal outlook following Trump’s election and is positioning for a potential increase in long-term yields, noting that the “Red Sweep” complicates fiscal dynamics.
