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Bond yields have soared after Trump’s re-election, which could impact the interest rates consumers get on loans.
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Ten-year government bond yields rose by 18 basis points, and thirty-year government bond yields saw their biggest increase since March 2020.
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Trump’s policies could increase inflation, which could impact the Federal Reserve’s interest rate strategy.
Bond yields are soaring following Donald Trump’s re-election, indicating that US borrowers may not get the relief they had hoped for as Trump’s policies have the potential to complicate the Federal Reserve’s interest rate plans.
The yield on ten-year US government bonds rose 18 basis points to 4.477% on Wednesday morning, the highest level since July 1. Rates have risen 76 basis points since the Fed launched its first rate cut of the cycle in mid-September.
Long-term yields also rose sharply, with the yield on 30-year US government bonds rising as much as 24 basis points, marking the biggest increase since March 2020.
Treasury yields influence the pricing of consumer and corporate bonds, and the latest increases will put pressure on consumer borrowers looking to take out a mortgage to buy a house or an auto loan to buy a car.
The average 30-year mortgage rate — which closely mirrors the 10-year Treasury yield — has risen toward 7% and is likely to eclipse that level if Wednesday’s rate hike continues.
That would return mortgage rates to this summer’s levels, diminishing hopes for potential homebuyers for any improvement in affordability.
The rise in bond yields is driven by expectations that Trump’s policy proposals, such as broad tariffs, tax cuts and the deportation of millions of immigrants, would be inflationary and push up prices and wage growth. That would cause the Fed to change its roadmap for further rate cuts as prices and wage growth creep up again.
“The Federal Reserve may believe that if fiscal policy is eased from their previous baseline forecasts, it will need to implement tighter monetary policy, implying higher neutral rates to keep inflation at the 2% target,” he said. James Knightley. , says an economist at ING Economy.
While markets expect the Fed to go ahead with a 25 basis point rate cut at its meeting on Thursday, the likelihood of another 25 basis point rate cut in December fell from 77% on Tuesday to 66% on Wednesday, according to the FedWatch Tool from the CME. .
Economist Derek Tang of LH Meyer/Monetary Policy Analytics said the Fed could already be recalibrating monetary policy to adjust to expectations of a second Trump term.
“Their psychology might be, ‘Cutting a little more slowly will give us a little more time to observe what’s actually happening with inflation expectations and the labor market,’” Tang said.
Trump himself strongly advocated for the Fed to aggressively cut rates during his first term as president, and also said during his campaign that the president should have a say in monetary policy.
With Fed Chairman Jerome Powell’s term set to expire in May 2026, the appointment of a new Fed chairman who is open to cutting rates despite the potential for higher inflation could happen.
“President Trump has an easy path to nominating and installing a candidate who is more willing to accommodate his views on interest rate policy,” ING’s Knightley said.
Read the original article on Business Insider
