Bond Market Faces Uncertain Path as Traders Recover from Turbulent Week

The bond market selloff triggered by Donald Trump’s recent presidential win ended almost as quickly as it started. However, firms like BlackRock Inc., JPMorgan Chase & Co., and TCW Group Inc. are cautioning that the market’s volatility is far from over.

Trump’s impending return to the White House has significantly shifted the outlook for the U.S. Treasury market. October's losses have already erased much of this year's gains, and Trump's proposed tax cuts and large tariffs could reintroduce inflation by raising import costs and stimulating an already strong economy. His fiscal plans, unless offset by spending cuts, could also drive up the federal deficit, raising concerns about whether bondholders will demand higher yields to accommodate the rising supply of Treasuries.

“If the bond market imposes fiscal discipline, we could see an unwelcome rate increase,” said Janet Rilling, senior portfolio manager and head of the Plus Fixed Income team at Allspring Global Investments. She forecasts the 10-year Treasury yield could rise back to 5%, the peak reached in late 2023, about 70 basis points higher than Friday’s level, if Trump fully implements his proposed tariffs.

Uncertainty remains regarding the exact policies Trump will implement, and some of the potential impacts may already be reflected in prices. Treasury yields surged midweek to multi-month highs, only to fall back, ending lower than where they started.

Anticipation of Trump's growth-oriented policies has also led traders to scale back expectations for how much the Federal Reserve will cut rates next year, cooling hopes of a bond rally as the Fed eases policy. Economists from Goldman Sachs, Barclays, and JPMorgan have revised their forecasts, anticipating fewer rate cuts, while swaps traders now expect the Fed’s benchmark rate to hit 4% by mid-2025—higher than projections from September. Currently, the rate is in a 4.5% to 4.75% range.

Upcoming economic data, including the latest consumer and producer price reports, could spark renewed volatility. Fed Chair Jerome Powell, New York Fed President John Williams, and Fed Governor Christopher Waller are scheduled to speak, potentially offering insights into their outlooks. Rick Rieder, BlackRock’s chief investment officer for global fixed income, has advised investors not to expect bond prices to rebound. While recent rate moves present an opportunity to secure elevated yields on short-term bonds, he remains cautious about long-term debt given current uncertainties.

Following the Fed’s rate cut last Thursday, Powell refrained from speculating on how Trump’s policies could impact Fed strategy but indicated it’s unclear if the recent yield rise will persist. Analysts generally expect that Trump’s policies could deepen the federal deficit, which has already grown under President Biden. The Committee for a Responsible Federal Budget recently projected Trump’s proposals would add $7.75 trillion to the national debt by 2035.

“At some point, a growing deficit and debt service costs should translate into a higher yield premium,” said Ruben Hovhannisyan, fixed-income portfolio manager at TCW Group. “The question is just how much more fiscal expansion we’ll see under this administration.”