Bond Rebound Uncertainty: Trump's Plans Overshadow Fed Rate Cuts

The U.S. government bond market has been grappling with uncertainty as Donald Trump's return to the White House is expected to usher in fiscally expansive policies that could temper the extent of the Federal Reserve's future rate cuts. The Fed recently lowered rates by 25 basis points, following a 50 basis point reduction that kicked off its current easing cycle in September. However, the outlook for further rate cuts has been 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. This could make the Fed wary of risking an inflationary rebound by cutting rates too deeply next year, potentially slowing the bond market rebound.

Treasury yields, which move inversely to government bond prices, have surged by over 70 basis points since mid-September and recently notched their biggest one-month rise since the 2008 global financial crisis, according to UBS Global Wealth Management. The move coincided with Trump's improving standing in polls and betting markets throughout October. Fed funds futures show investors are now expecting rates to decline to about 3.7% by the end of next year from the current 4.5%-4.75% range, about 100 basis points higher than what was priced in September. Strategists at BofA Global Research recently shifted their near-term target for Treasury yields to the 4.25% to 4.75% range, from 3.5% to 4.25% previously.

Inflation expectations, as measured by Treasury Inflation-Protected Securities (TIPS), surged this week, with the 10-year breakeven inflation rate rising to 2.4% on Wednesday, its highest in over six months. Dan Ivascyn, group chief investment officer at bond giant PIMCO, expressed concern about rebounding inflation forcing the Fed to slow or pause rate cuts. "I think the pain trade for the market over the short term would be a situation where inflation begins to re-accelerate," he said.

A so-called Red Sweep scenario in which Republicans control the White House and both houses of Congress could make it easier for Trump to enact tax cuts and give Republicans more leeway for their economic agenda. While Republicans were set to hold a majority of at least 52-48 in the U.S. Senate, final control of the lower chamber was yet unclear, with vote counting still underway late Thursday. Andrzej Skiba, head of BlueBay U.S. Fixed Income at RBC Global Asset Management, warned that long-term bonds could sell off further if tariffs are rolled out to the extent that they believe they will, potentially preventing the Fed from cutting rates.

Rick Rieder, BlackRock's chief investment officer of global fixed income, cautioned against assuming aggressive rate cuts in 2025, and said bonds were more attractive as an income-generating asset than a play on falling rates. Angelo Kourkafas, senior investment strategist at Edward Jones, noted that when 10-year Treasury yields neared 4.5% or went higher over the last year, it has triggered some pullbacks in equity markets. "That could be a level that people are looking at," he said. Ten-year yields stood at 4.34% late on Thursday.



The uncertainty surrounding Trump's economic policies and their potential impact on inflation and interest rates has created a challenging environment for bond investors. As the Fed continues to monitor the situation, it remains to be seen how Trump's plans will influence the bond market rebound and the Fed's rate-cutting cycle.



In conclusion, the bond market rebound is uncertain as Trump's plans overshadow the Fed's rate cuts. The potential impact of Trump's economic policies on inflation and interest rates has created a challenging environment for bond investors. As the Fed continues to monitor the situation, it remains to be seen how Trump's plans will influence the bond market rebound and the Fed's rate-cutting cycle.