(Bloomberg) — The bond market sell-off unleashed last week by Donald Trump’s presidential victory ended almost as quickly as it began.
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Yet companies like BlackRock Inc., JPMorgan Chase & Co. and TCW Group Inc. issued a steady series of warnings that the bumpy ride is likely far from over.
Trump’s impending return to the White House has significantly improved the outlook for the US Treasury market, where October’s losses had already erased much of this year’s gains.
Less than two months after the Federal Reserve began pulling back interest rates from their highest levels in more than two decades, the likelihood that Trump will cut taxes and impose high tariffs threatens to reignite inflation by raising import costs. and provide stimulus to an already strong economy. economy.
His budget plans — unless offset by massive spending cuts — would also cause the federal budget deficit to rise. And that, in turn, has revived doubts about whether bondholders will demand higher interest rates in exchange for absorbing an increasing supply of new government bonds.
One scenario is “the bond market imposes fiscal discipline with an unpleasant rise in interest rates,” says Janet Rilling, senior portfolio manager and head of the Plus Fixed Income team at Allspring Global Investments.
She predicted that 10-year Treasury yields could rise back to a peak of 5% by the end of 2023, about 70 basis points above Friday’s level. That “was the cycle level and it is a reasonable level if the proposed rates are fully implemented.”
There remains significant uncertainty about the precise policies Trump will pursue, and some of the potential impact has already been priced in, as speculators began betting on his victory well before the election. While yields on 10- and 30-year Treasury bonds rose to their highest levels in months on Wednesday, they fell back over the next two days, ending the week lower than it started.
But the prospect that Trump’s policies will boost growth has prompted traders to temper their expectations about how much the Fed will cut rates next year, raising hopes that bonds will recover if policy is aggressively eased. go into the ground.
Economists at Goldman Sachs Group Inc., Barclays Plc and JPMorgan revised their Fed forecasts to show fewer cuts. Swap traders are taking into account that policymakers will cut interest rates to 4% by mid-2025, a full percentage point higher than they predicted in September. It is now between 4.5% and 4.75%.
Next week’s economic data, especially the latest consumer and producer price figures, could lead to renewed volatility. Fed Chairman Jerome Powell, New York Fed President John Williams and Fed Governor Christopher Waller will also speak and possibly provide new insights into their prospects.
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“Election trading will take a breather as gamblers look to recalibrate risk and take some profit off the table. This is pretty much what we saw in the aftermath of the 2016 election; after a big rally the next day, the S&P moved sideways for a few days before taking off again. The rise in Treasury yields was more consistent and pronounced, but the Fed was on the cusp of a restart of rate hike normalization, not in the midst of an easing cycle.”
Rick Rieder, BlackRock’s chief investment officer for global fixed income, has told investors not to expect bond prices to rise from here. He said the recent backup is an opportunity to lock in higher yields on short-term bonds, but he remains cautious about longer-term debt given the current uncertainty.
After Thursday’s Fed meeting, he said in a note to clients that the previous day’s sell-off had made short-term rates “extremely attractive.” But “venturing into the wild blue out there of longer-term rates,” he added, “may not be worth that excitement (or the volatility).”
Others see the risk that the bond market could fall even further. JPMorgan’s Bob Michele, chief investment officer and head of global fixed income at the asset management division, is among those warning that 10-year Treasury yields could eventually rise back to 5% after Trump comes to power. At Amundi SA, Europe’s largest asset manager, CIO Vincent Mortier has also emphasized this point, saying it is a “real alert level” that could penetrate the stock market by pushing investors to shift money into bonds.
After the Fed cut rates for the second straight time on Thursday, Powell declined to speculate on how Trump’s plans could affect the bank’s stock price. He said it was not clear that the recent rise in interest rates would last.
But analysts widely expect the next Trump administration to worsen the federal budget deficit, which has already widened under President Joe Biden. The Committee for a Responsible Budget estimated last month that Trump’s plans would increase the debt by $7.75 trillion more than currently projected for the 2035 budget year.
“At some point, all things being equal, increasing deficit and debt servicing should lead to a higher yield premium,” said Ruben Hovhannisyan, fixed income portfolio manager at TCW Group. “The question is to what extent budget deficits will increase under this government.”
What to watch
Economic data:
November 12: NFIB optimism for small businesses; Survey of senior Fed loan officers
November 13: MBA Mortgage Applications; real average income; Consumer Price Index; monthly budget overview
November 14: Producer Price Index; unemployment claims
November 15: Empire Production; retail; import and export price index; industrial production; occupancy rate; business inventories
Fed Calendar:
November 12: Fed Governor Christopher Waller; Tom Barkin, president of the Richmond Fed; Fed Chairman Patrick Harker of Philadelphia
November 13: Dallas Fed President Lorie Logan; St. Louis Fed President Alberto Musalem; Fed Chairman Jeffrey Schmid of Kansas City
November 14: Barkin; Fed Chairman Powell; New York Fed President John Williams
