While much of the focus on Donald Trump’s electoral victory has been trying to discern what a Republican trifecta could do to the Inflation Reduction Act, Trump’s effect on the bond market may be just as important. We may still living in
James Carville’s world, where the bond market can “intimidate everybody.” And it’s rearing its head against the president-reelect.
Since Trump came to be seen as the likely winner in the months before election day, yields on U.S. government debt — that is, the returns bondholders and issuers have to offer to entice investors — began to shoot up. Interpreting moves in the bond market is always tricky, but many market commentators interpreted the recent run-up as at least in part a reaction to Trump, whether they thought he was going to juice economic growth or stoke inflation, or some combination of the two.
“If Trump is proposing a broadly inflationary high-tariff, low-tax agenda, anyone expecting inflation is looking for a higher return,” explained Advait Arun, a climate and infrastructure finance analyst at the Center for Public Enterprise.
Each of these policies — high tariffs and low taxes — could have an inflationary effect. Tariffs could lead to higher consumer prices (especially the kind of
broad-based tariffs Trump has proposed) while tax cuts act as stimulus by keeping more cash in the economy. Combined with higher defense spending and a reduced labor force if Trump follows through on his plan for mass deportations, the whole policy agenda could wind up reversing some of the progress the economy has made recovering from the high inflation of the immediate post-COVID period, or at least make it so the Federal Reserve sees no further need to cut interest rates.
“Tariffs, especially if universally placed on all imports, is broadly viewed as an inflationary policy, which may pose a risk to the outlook for lower interest rates,” Morgan Stanley analyst Andrew Perocco wrote in a note to clients. “All else equal, higher rates are seen as a headwind for the renewable energy sector due to higher financing costs.”
Yields on the 10-year Treasury note, a widely used benchmark throughout the global economy, were sitting at around 3.6% in mid-September when the Fed began cutting rates, but had risen to 4.36% the week before the election. Yields shot up again last week
after Trump’s win, which confirmed the market’s suspicion that his inflationary plans will be realized. Today they’re around 4.43% and rising.
“Interest rates are moving higher in much the same way they did when he won in 2016,” aid Skanda Amarnath, executive director of Employ America told me. “There’s a Trump trade people do — the dollar gets stronger, interest rates are higher.” These policies may be “more stimulative to the economy on some level,” and in turn, “maybe this means the Fed is more cautious about lowering interest rates.”
The market certainly seems to think Trump will run the economy hot. Expectations for where the federal funds rate could end up by the end of 2025 have risen from
3% in September to about 3.8%, Gautam Jain, a senior research scholar at Columbia University’s Center on Global Energy Policy. Several analysts have scaled back their forecasts for the number of future Federal Reserve rate cuts next after the Fed lowered rates by another quarter percentage point last week. Yields on two-year Treasury notes, which are considered to be highly sensitive to expectations of Federal Reserve action, have risen from 3.55% in mid-September to 4.34% today, the highest level since July.
And sustained high rates mean sustained high costs for renewable energy companies. Jain had previously estimated that a 2 percentage point drop in the cost of debt would lower offshore wind costs by as much as $10 per megawatt-hour and utility-scale solar by as much as
$12 per megawatt-hour, which would help make them more competitive even in the absence of federal subsidies. If the cost of capital stays high, that potential boost goes away.
“For renewables, they are more capital intensive, so they are more impacted” by rising rates, Jain told me. “The headwind will hurt them more.”
Bipartisan budget watchdogs have been skeptical of Trump’s policies,
typically projecting
larger deficit increases than would have arisen from the policy agenda of Democratic nominee Kamala Harris. That said, not everyone is worried.
The hedge-fund investor Scott Bessent,
widely tipped to be Trump’s pick for Treasury Secretary, has been promoting a “3-3-3” plan — deficits reduced to 3% of gross domestic product from around 7% currently by the end of Trump’s term; annual growth kicked up to 3% from around 2.8% today; and oil production increased by 3 million barrels, all of which could allow the Federal Reserve to bring down rates.
Trump “understands financial markets and the bond markets. He would not want deficits to get out of control,” Stephen Miran, a fellow at the Manhattan Institute and former Trump Treasury official told me. “There's a lot of focus to rein that in.”
