The election of Donald Trump sent shockwaves through financial markets on Wednesday, with stocks reaching record highs as traders saw the victory as a potential end to political uncertainty. The S&P 500 and Dow Jones indexes rallied, with some economists viewing the upswing as a tentative endorsement of Trump’s economic strategy.
But while stock market investors cheered, the bond market told a different story. As investors moved away from the relative security of bonds, the yield on the 10-year Treasury rose to 4.479%—a four-month high. Rising yields indicate falling bond prices, reflecting concerns among bondholders about potential increases in inflation and the widening federal deficit anticipated under Trump’s administration. Trump’s pledge to maintain and expand tax cuts has raised alarms among economists, who predict a deficit growth beyond the current $1.8 trillion level.
Economic Outlook: Higher Yields and Fiscal Warnings
Treasury bond yields, viewed as a reliable economic barometer, had already been climbing in the weeks leading up to Trump’s victory, as investors anticipated fiscal policies that could spur inflation and require additional government borrowing. Yields rose further on Wednesday, with the yield on the 10-year bond increasing by 0.2 percentage points—a significant jump for the bond market.
Bond market concerns reflect both policy and fiscal fears. Investors are wary of the impact of high deficit spending, especially if it continues without a corresponding reduction in government outlays. “In the current economic cycle, bond investors might perceive there to be more risk of holding U.S. debt if there’s not an eye on a plan for reducing spending, which there isn’t,” noted Jonathan Lee, a senior portfolio manager at U.S. Bank.
Bond Market in the Shadow of Rate Cuts and Government Spending
Although the Federal Reserve cut interest rates on Thursday, lowering the federal funds rate by a quarter of a point, long-term bond yields have continued to rise. This trend signals that investors are more concerned about long-term fiscal health than the immediate effects of interest rate cuts, which primarily affect short-term bonds.
Bond traders expect deficits to swell if Trump’s plans to renew the 2017 Tax Cuts and Jobs Act move forward, especially under a Republican-led Congress. The tax cuts, initially enacted during Trump’s first term, reduced rates across income brackets but significantly increased the national deficit. Recent spending, including COVID-19 relief measures under the Biden administration, has added further pressure to government finances, and bondholders are wary of a repeat under Trump.
Investors’ Long-Term Concerns: U.S. Debt and Creditworthiness
Beyond the immediate future, some investors worry that the growing federal debt will jeopardize the United States’ creditworthiness over time. Todd Jablonski, global head of multi-asset investing at Principal Asset Management, observed, “We’re living beyond our means in the United States, and we have been for a very long time.” The fear is that if the U.S. continues its current fiscal trajectory without adequate revenue generation, investor confidence in the country’s financial stability could erode, leading them to demand even higher yields for lending.
A Bipartisan Gap on Fiscal Policy
Neither Trump nor Democratic presidential candidate Kamala Harris presented a solid plan to curb the deficit during their campaigns. While Harris proposed tax hikes on corporations and the wealthy to generate revenue, economists noted that a more comprehensive deficit reduction strategy was missing on both sides.
As the U.S. braces for a new economic chapter under Trump, bond investors are signaling caution. While the stock market rallies on economic optimism, the bond market’s skepticism suggests that any enthusiasm over fiscal policy may be tempered by the realities of managing national debt and balancing inflation risks.
