(Bloomberg) — Bond traders are entering the new year with lowered expectations as a resilient U.S. economy and President-elect Donald Trump's tax-cutting and tariff policies threaten to keep Treasuries under pressure.
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Already, a drumbeat of strong economic data, Trump's Republican electoral sweep and the cautious tone of Federal Reserve officials have fueled a decline in the bond market as investors recalibrate expectations for the central bank.
The reset has hit longer-dated bonds the hardest, sending the yield on benchmark 10-year Treasuries to nearly 4.6%, about a full percentage point higher than when the Fed first began easing monetary policy in September. The impact on two-year government bonds has been more muted, reflecting a shift by investors to securities anchored by the Fed's policy rate and less affected by changes in the longer-term outlook.
“There is a lot of concern about inflation (tariffs, fiscal stimulus, immigration) and some optimism about growth (fiscal stimulus, deregulation), which explains the move in rates over the past few months,” said Priya Misra, manager portfolio at JPMorgan Asset Management.
The low bond market outlook marks a turnaround from early 2024, when many on Wall Street were predicting a solid year of gains once the Fed began pulling interest rates back from more than two-decade highs.
But those expectations were premature, leaving investors now hesitant to bet on a rally while the economy is still going strong. At the same time, Trump's tax cuts and tariff plans could add to inflationary pressures by piling on fiscal stimulus and increasing import prices. An increase in the deficit could also add to the supply of Treasury bonds.
Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, said sticking with shorter-maturity notes “isn't a bad approach right now.”
“Until you see the pain in the economy, even though yields have risen quite a bit, it's better to keep the powder dry,” he said.
Currently, futures traders are predicting that the Fed could keep policy steady until as late as June and is likely to cut its benchmark rate by just another half a percentage point in each of 2025.
What Bloomberg strategists say…
“An immediate announcement following on from what Trump has outlined in his social media posts would trigger a sell-off in Treasuries, with any surge in yields likely to be capped at 30 basis points, keeping the yield below 5%.