Bond Market Braces for Rough Ride as Trump's Victory Unfolds

The bond market selloff triggered by Donald Trump's presidential victory last week was as swift as it was short-lived, but experts warn that the bumpy ride is far from over, reports Bloomberg.

While the market stabilized this week, firms like BlackRock, JPMorgan Chase, and TCW Group are sounding the alarm, citing Trump's potential impact on fiscal policy and interest rates.

"The bond market instills fiscal discipline with an unpleasant rise in rates," says Janet Rilling, senior portfolio manager at Allspring Global Investments, to Bloomberg. She predicts the 10-year Treasury yield could climb back to the peak of 5% hit in late 2023, about 70 basis points higher than current levels.

Trump's return to the White House has significantly altered the outlook for the US Treasury market, where October losses had already erased much of this year's gains. The market is grappling with the prospect of Trump enacting tax cuts and imposing tariffs, which could rekindle inflation and strain the federal budget.

The Fed, having just cut rates for the second consecutive meeting, is now facing uncertainty about its path forward. Analysts widely expect the next Trump administration to worsen the federal deficit, further increasing the demand for new Treasuries.

"At some point, an increasing deficit and debt servicing, all things equal, should lead to a higher yield premium," says Ruben Hovhannisyan of TCW Group to Bloomberg. "The question is the degree of how much more fiscal deficits will grow under this administration."

The coming week's economic data, particularly inflation readings, could spark renewed volatility. Fed Chair Jerome Powell, New York Fed President John Williams, and Fed Governor Christopher Waller are also scheduled to speak, offering potential insights into their outlooks.

Despite the recent market turbulence, Federal Reserve Bank of Minneapolis President Neel Kashkari stated on Sunday that the US economy remains remarkably strong as the central bank battles inflation, although he acknowledged that the Fed is "not all the way home."

Investors are grappling with the implications of Trump's policies, which could necessitate a more aggressive Fed response than previously anticipated.

"Election trades are set for a bit of a breather as punters look to recalibrate risk and sweep a bit of profit off the table," says Cameron Crise, Bloomberg macro strategist. "This is kind of what we saw in the aftermath of the election in 2016; after a big rally the day after, the S&P moved sideways for a few days before taking off again. The rise in Treasury yields was more consistent and pronounced, but then again the Fed was on the verge of re-starting its rate-hike normalization, not in the midst of an easing cycle."