The debt market expected Donald Trump to retake the White House, but a resounding Republican victory and possible control of both houses was not the expected scenario. He is also not a favorite among bond investors, unlike stock market investors. A second Trump term, with support from the legislative branch to enforce his tough policies on tariffs and immigration and to extend tax cuts, suggests higher inflation as well as worsening imbalances in US government accounts over the medium term. And that’s what’s being quoted today in the bond market, which is seeing rising bond yields, especially over the longer term, and expecting rates to be cut by the Federal Reserve in the coming months.
A quarter-point rate cut at tomorrow’s Fed meeting, in the midst of an election hangover, is certain. The strength of the US economy and falling inflation pave the way for this new decline. But today the market is beginning to fear, with more arguments, what it partly expected in recent weeks: a mandate that in the short term could lead to more inflation and therefore require smaller rate cuts than expected, and which in the medium term could make the situation worse . current imbalance in government accounts and create distrust in US sovereign debt. “The main risk is that investors will become seriously concerned about the trajectory of US government reports, which will be extremely destabilizing for markets,” says David Macia, director of investments and market strategy at Creand Asset Management.
“We expect tax cuts for consumers and businesses, a key pillar of Trump’s populist views, to come soon. Tariffs may rise over time, which is more of a threat than a reality at this point. In any case, it is highly likely that a new fiscal expansion is approaching. This is inconsistent with Trump’s desire for the Fed to cut rates aggressively,” explains Aaron Rock, head of interest rates at Abrdn. The expert predicts that US Treasury yields will deviate upward, especially in the long term.
It is in long-term rates that one can see the medium-term concerns underlying the market, beyond the more immediate inflation risk associated with the Trump mandate. The fiscal expansion that experts expect implies a worsening of the government deficit and debt levels already facing the US economy. The US government deficit is 6.3% of GDP and the national debt is 118%, and reducing it is not currently a goal of Donald Trump’s economy. offers. According to a recent report published by the Committee for a Responsible Federal Budget, a US organization that considers itself independent and non-partisan, Trump will increase the US national debt by $7.5 trillion in 10 years, based on statements made during the election campaign. campaign. . And the Congressional Budget Office (CBO) projects that the federal budget deficit will remain above 6% of GDP in the coming years, and the debt-to-GDP ratio will exceed 120%.
Investors are now adjusting their expectations for Fed rate cuts in the coming months, and their selling is concentrated in 10-year US bonds. Its yield is rising today, in line with the price decline, to 4.46%, its highest level since July, up 20 basis points. The rise in yields underscores the longer-term outlook, with the 30-year note rising above 20 basis points, its biggest daily rise since 2020, to 4.66%. Meanwhile, in the futures market, bets on a further decline in the price of money are weakening. As of next Dec. 18, the market now gives a 30.7% chance that the Fed won’t change rates, up from 22% the previous day and just 2.1% the month before. And doubts intensify next year. By June 2025, futures give only a 19% chance that rates will fall to between 3.5% and 3.75%, down one point from current levels, down from 39.5% a month ago. In short, while investors were previously expecting four rate cuts of 25 basis points each before June 2025, three cuts are now expected before May, putting the June cut in doubt. This adjustment in rate expectations is now leading to the euro’s biggest fall against the dollar since 2016.
Trump has promised to cut corporate taxes from 21% to 15% and extend the income tax cuts he himself enacted in 2017. “Fixed income investors are reacting to the possibility that tax cuts will not be accompanied by significant cost containment. The bond market is also expecting higher growth and possibly higher inflation. This combination could slow or even stop the rate cuts planned by the Federal Reserve,” they conclude in Franklin Templeton. In a populist rhetoric that investors will now inevitably have to consider, Trump has gone so far as to propose eliminating $35 trillion in US national debt using crypto assets. “Cryptocurrency assets have a great future. We might pay $35 trillion in cryptocurrency,” the next US president said at a forum in late September.
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