By Davide Barbuscia and Lewis Krauskopf
NEW YORK (Reuters) – Prospects for a near-term rebound in the $28 trillion U.S. Treasury market are faltering, as Donald Trump’s return to the White House is expected to usher in expansionary fiscal policy that will reduce the size of the interest rate from the Federal Reserve could dampen. future interest rate cuts.
The Fed cut rates by 25 basis points at its monetary policy meeting on Thursday, following a massive 50 basis point cut that kicked off the current easing cycle in September.
But the prospects for further rate cuts are clouded by expectations that key elements of Trump’s economic platform, such as tax cuts and tariffs, will lead to faster growth and higher consumer prices. That could make the Fed wary of risking an inflation recovery by cutting rates too deeply next year, damaging expectations that falling borrowing costs could fuel a bond recovery after a weeks-long sell-off.
“We think one of the biggest consequences (of the election) will be that the Fed will cut rates more gradually than would have been the case,” said Tony Rodriguez, head of fixed income strategy at Nuveen. In 2025 we now think there will be fewer and further apart.”
Government bond yields – which move opposite to government bond prices and tend to follow interest rate expectations – have risen by more than 70 basis points since mid-September and recently posted their biggest one-month increase since the 2008 global financial crisis, said UBS Global Wealth. Management. The move coincided with Trump’s improved ranking in polls and betting markets in October.
Fed funds futures show that investors now expect rates to fall to around 3.7% by the end of next year, down from the current range of 4.5%-4.75%. That’s about 100 basis points higher than what was priced in September.
Strategists at BofA Global Research recently shifted their short-term target for Treasury yields to a range of 4.25% to 4.75%, from 3.5% to 4.25% previously.
Fed Chairman Jerome Powell declined on Thursday to speculate on the impact the new US administration will have on monetary policy. He said higher rates were likely to reflect an improved economic outlook rather than higher inflation expectations. Consumer prices showed the smallest increase in more than three and a half years in September.
Still, inflation expectations, as measured by Treasury Inflation-Protected Securities (TIPS), have soared this week, with the 10-year breakeven inflation rate rising to 2.4% on Wednesday, the highest in more than six months.
Dan Ivascyn, group chief investment officer at bond giant PIMCO, said he was concerned about a rebound in inflation forcing the Fed to slow or pause interest rate cuts.
