By Davide Barbuscia and Lewis Krauskopf
NEW YORK (Reuters) – Prospects of a near-term rebound in the $28-trillion U.S. government bond market are faltering, 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 lowered rates by 25 basis points at its monetary policy meeting on Thursday, following a jumbo-sized, 50 basis point reduction that kicked off its current easing cycle in September.
But 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. That could make the Fed wary of risking an inflationary rebound by cutting rates too deeply next year, denting expectations that falling borrowing costs could spur a rebound in bonds after a weekslong selloff.
“One of the major impacts (of the election), we think, will be to cause the Fed to lower rates more gradually than would have been the case,” said Tony Rodriguez, head of fixed income strategy at Nuveen. “Expected cuts in 2025 we now think will be fewer and further apart.”
Treasury yields – which move inversely to government bond prices and tend to follow interest rate expectations – 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. That is 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.
Fed Chair Jerome Powell on Thursday declined to speculate on the impact the new U.S. administration will have on monetary policy. He said higher yields were likely more reflective of an improved economic outlook rather than higher inflation expectations. Consumer prices notched their smallest rise in more than 3-1/2 years in September.
Still, 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, said he was worried about rebounding inflation forcing the Fed to slow or pause rate cuts.
