Bond Traders See Fraught Year Ahead as Trump Shadows Outlook

(Bloomberg) -- Bond traders are entering the new year with diminished expectations as the resilient US economy and President-elect Donald Trump’s tax-cut and tariff policies threaten to keep Treasuries under pressure.

Already, a drumbeat of strong economic data, the electoral sweep by Trump’s Republicans and the cautious tone of Federal Reserve officials have fueled a bond-market downturn 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 more than 4.6%, roughly a full percentage point above where it was when the Fed first started easing monetary policy in September. The impact on two-year government bonds has been more muted, reflecting a shift by investors into securities that are anchored by the Fed’s policy rate and less affected by shifts in the 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 last few months,” said Priya Misra, portfolio manager at JPMorgan Asset Management. 

The downbeat bond-market outlook marks a shift from the start of 2024, when many on Wall Street were anticipating a solid year of gains once the Fed began pulling interest rates back from a more than two-decade high. 

But those expectations proved premature, leaving investors now hesitant to bet on a rally while the economy keeps chugging ahead. At the same time, Trump’s tax cuts and tariff plans could add to inflation pressures by piling on fiscal stimulus and increasing import prices. A rise in the deficit could also add to the supply of Treasury bonds. 

Jack McIntyre, portfolio manager at Brandywine Global Investment Management, said sticking with shorter-maturity notes “is not a bad approach right now.”

“Until you see the pain in the economy, even though yields have come up quite a lot, it’s just better to keep the powder dry,” he said.

Right now, futures traders anticipate that the Fed could hold policy steady until as late as June and is likely to only cut its benchmark rate by another half percentage point in all of 2025. 

What Bloomberg strategists say...

“An immediate announcement that follows through on what Trump has outlined in his social media posts would spur a sell-off in Treasuries, with any surge in yields likely to capped at 30 basis points, keeping yields below 5%.

— Ven Ram, Bloomberg Cross-Assets Strategist. 

Read here

The market will see a test of demand with a slate of Treasury auctions that start on Monday, a day earlier than usual, because of the market’s closure Thursday to honor the death of former President Jimmy Carter. The auctions will include new 10- and 30-year securities.

Benchmark yields pushed higher in Asia trading Monday, rising as much as 3 basis points to 4.63%.

Those auctions will be followed by the Labor Department’s monthly employment report on Friday, which is expected to show that 160,000 employees were added to payrolls in December, a slight slowdown from 227,000 the previous month, according to economists surveyed by Bloomberg. Given how much yields have risen, JPMorgan’s Misra said there’s a chance that a sharper-than-anticipated slowdown in job growth could cause bond prices to bounce back some. 

“A weak number will bring talk about a March Fed rate cut back on the table,” she said.

What to Watch

--With assistance from Ruth Carson.

(Updates yields)

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