Bond investors express skepticism about the impact of Trump’s economic policies, predicting higher long-term Treasury yields despite recent declines. The 10-year Treasury yield fell to 4.43% amid economic slowdown concerns but rose again due to inflation fears linked to tariffs. Analysts highlight the influence of tariffs on global markets by 2025. Elon Musk’s proposed spending cuts face doubt, while rising public debt is expected to drive long-term yields higher. Experts remain uncertain about future budget progress.
Bond Market Reactions to Economic Policies
Despite Mr. Bessent’s optimistic remarks, bond investors and analysts remain skeptical. The expectation is that Mr. Trump’s trade and fiscal policies will push long-term Treasury yields higher, counteracting falling energy prices and reductions in public spending. Padhraic Garvey, the regional head of research for the Americas at ING, emphasized the significance of service sector inflation and its persistence over recent months. He noted, “The tariff agenda can only exert upward pressure on prices and will likely have a more pronounced effect than the energy price control plan.”
Recent Trends in Treasury Yields
This week, the yield on the 10-year Treasury note dropped to 4.43%, reaching a seven-week low, primarily due to signs of an economic slowdown and a surge in safe-haven asset purchases amid geopolitical uncertainties. Guidance from the Treasury Department has also alleviated market fears regarding an immediate spike in long-term public debt issuance. However, yields experienced a slight increase on Thursday, as short-term yields rose earlier in the week amidst concerns of inflation driven by Trump’s potential tariffs on key U.S. trading partners. While yields stabilized after the postponement of tariffs on Mexico and Canada, the looming threat of a trade war continues to cast a shadow over the markets.
According to an annual survey by JPMorgan Chase, traders anticipate that tariffs and inflation will significantly influence global markets by 2025. Mark Malek, investment director at Siebert, clarified that while it is beneficial to keep 10-year Treasury yields low, ultimately, it is the market that dictates these rates. He stated, “The market has recently pushed 10-year yields higher due to anticipated inflation from trade frictions and the expected rise in deficit spending leading to increased public debt.”
Bessent argued that the recent decline in 10-year yields reflects the bond market’s acknowledgment of potential ‘non-inflationary growth’ with declining energy prices. He mentioned efforts to cut spending and enhance government efficiency, suggesting that a favorable interest rate cycle could be on the horizon. However, since the start of October, 10-year yields have climbed by approximately 70 basis points, as investors began to consider the implications of a Trump victory in the upcoming U.S. elections on November 5. Bessent, a former hedge fund manager, has consistently noted the government’s ‘spending problem’ while advocating for the renewal of tax cuts enacted during Trump’s first term, which could lead to deficits exceeding $4 trillion over the next decade, based on Congressional Budget Office estimates.
Elon Musk’s plans for government efficiency, aiming to cut public spending by $2 trillion, have been met with skepticism. Garvey remarked, “It takes a lot of fuzzy assumptions to extrapolate a significant degree of success” regarding these efforts. Meanwhile, Robert Kaplan, vice chairman of Goldman Sachs and former president of the Dallas Fed, indicated that the high level of public debt is likely to result in rising long-term yields in the future. He concluded, “The jury is still out on the extent of the progress we will make on the budget. If we make progress, you will see some improvement. I think it is even more likely that the yield curve will be tilted upward.”