Inquire of anyone in the bond market why the 10-year Treasury yield has been declining from its top of 4.8% earlier in January; you will most likely find that President Trump’s first week back in the White House lacked any significant tariff activity.
Though not the 60% level he mentioned on the campaign trail, Trump did indeed keep alive the threat of 25% tariffs on imports from Mexico and Canada starting perhaps as soon as Feb. 1. Said his team was exploring a 10% duty on Chinese imports.
Another theory holds that American government bonds merely were oversold because yields on longer-term Treasurys BX:TMUBMUSD10Y had marched upward since September, just as the Federal Reserve was starting to lower interest rates.
Though, in a week when Treasury yields were famous for hardly moving, a perhaps more significant theme was that it could be the quiet before another storm.
Referring to Trump’s repeated pledges for mass deportations of immigrants in the U.S. illegally, Ed Perks, a portfolio manager at Franklin Templeton FBLAX, said “I think markets are still going to have some processing to do, if we do come in one morning and find out there were very significant raids happening.”
Perks said, “that could very well be the case at some point in the near future,” adding that investors “still have to make our way through some of these issues – whether it’s immigration, whether it’s taxes – and the market will likely be volatile.”
While U.S. markets closed lower Friday, Trump’s first week back in the White House saw significant weekly increases in the Dow Jones Industrial Average DJIA, S&P 500 SPX, and Nasdaq Composite COMP, so hovering near record territory.
Still, in a sign of uncertainty running high, Perks said his team set up for 2025 by building diversified portfolios of stocks and bonds, plus a bucket of highly liquid assets like Treasurys, at the ready, “knowing we can step into the markets and liquidate up to 10% of our portfolios without blinking.”
Portfolio manager Chris Diaz of Brown Advisory’s global taxable fixed-income team told MarketWatch that he sees a fair likelihood of the 10-year Treasury yield retesting 5% – a level that in October 2023 coincided with a dramatic stock-market drop.
Trump’s emphasis on lowing taxes and other actions that risk adding to the significant U.S. debt load drives his principal worries, not tariffs or the possibility for increasing inflationary pressures.
“There’s a $2 trillion deficit as far as the eye can see, and that doesn’t include whatever kind of tax cuts or unfunded stimulus that would require more Treasury issuing” Diaz remarked.
Given Trump’s remarks this week suggesting he may know more about interest rates than Chair Jerome Powell and others in charge of decision-making on them, Diaz anticipates the Federal Reserve fielding questions on its independence next Wednesday’s press briefing.
Molly Brooks, U.S. rates strategist at TD Securities, said, “as we have been saying, the Fed is moving from data dependency to Trump dependence.”
