There may be a surprise check on Trump’s power in his second term, even though he’s expected to gain power in Congress thanks to the “red wave.”
Wall Street investors are getting ready for a fight over policies and plans that Trump ran on but that could make the U.S. debt load much higher and make it harder for the U.S. to get good deals on loans in other countries.
When asked if the bond market was ready to help Trump carry out his plans, Bill Zox, a portfolio manager at Brandywine Global, which is in charge of about $63 billion in assets, said, “Absolutely.”
As planned, the Federal Reserve cut interest rates by another 25 basis points on Thursday. However, Zox said that he thinks rate cuts will stop in December and probably happen again in the early part of 2025.
He said that the recent sharp drop in the nearly $28-trillion Treasury market is already influencing how the Fed will act in the future. Zox said, “Right now, the Treasury market, not the Fed, is in charge.”
Short-term policy rates are set by the Federal Reserve. Longer-term rates, which are used to support the economy, are set by the market. For that reason, the investors known as “bond vigilantes” might have a big part in Trump’s second term.
“There have been a lot of problems with fiscal policy in the last two years,” said Ali Meli, founder and chief investment officer of Monachil Capital Partners and a former partner at Goldman Sachs. He also said that Wall Street and Washington would have to fight over spending policies, no matter who won the election on November 5.
Meli said, “Even if the deficit stays the same, we need to find a home for close to $2 trillion of new Treasury issues every year.” “In general, the markets are the last line of defense against fiscal policy.”
Powell and the Fed say “no.”
If the Republicans take over Congress, it could support Trump’s plan, which includes suggested tax cuts and tariffs. But when he comes back to work in January, he will have to deal with a Fed that is determined to stand firm and keep inflation in check.
On Thursday, Fed Chair Powell told reporters that he wouldn’t step down if the President-elect asked him to. When asked about this option, Powell simply said “no.”
In public, Trump criticized past Fed moves to make money tighter. Then, in August, he criticized the organization and asked for a “say” in how it made decisions.
Many investors are getting more worried about the idea that Trump might make a “shadow” Fed chair and the small chance that Trump will try to fire Powell before the end of his term in mid-2026.
Brian Kennedy, a portfolio manager at Loomis, Sayles & Company, which manages about $388 billion in assets, said that if there was a big shift away from an independent Fed, Treasury yields would go up right away. This is similar to what happened when Turkish President Recep Tayyip Erdogan put pressure on the country’s central bank to lower rates, even though the economy was struggling with high inflation.
Kennedy told MarketWatch, “That’s just going to push people away by itself.” But he thinks Trump wouldn’t go that far in his fight with the Fed. “That seems like something only he would do. I find it shocking.”
Kennedy, however, said that there are signs of a “buyer’s strike” in the Treasury market. This is especially true since “price-insensitive” players like the Fed are selling off assets while some foreign governments are keeping their holdings the same or slightly lowering them.
He said that money managers, hedge funds, and people in the U.S. will have to make up the difference.
Meli talked about how the number of Treasury bonds owned by U.S. families has grown a lot in the last few years. The Fed says the share has grown from about $700 billion in the first quarter of 2022 to about $2.7 trillion now. Meli thinks that families, like professional investors, will need a premium to counteract any inflationary effects that Trump’s policies may have, or more supply to help pay for them.
Stocks go up, and bonds are scared.
Wall Street liked Trump’s “pro-growth” plans in the past, like cutting taxes on businesses. As people get excited about his second term, the S&P 500 index SPX 0.38% hits new highs. On Friday, it crossed the 6,000-point mark for the first time.
The Wells Fargo Investment Institute says that more planned tax cuts for businesses and less government regulation should lead to gains in stock prices across the board.
But Trump’s promise to quickly close the border and deport people who came to the U.S. illegally has been called inflationary, since many blue-collar jobs, like building, depend on Hispanic immigrants because there aren’t enough people in the U.S. to do them.
If that happens, it might be harder for Powell to keep inflation in the 2% goal range set by the Federal Reserve. It might also be harder for the Fed to lower short-term rates to between 3.25% and 3.5% by the end of next year.
Since the U.S. election, the 10-year Treasury yield TMUBMUSD10Y 4.310% has been moving lower from its recent high point. It was around 4.31% on Friday, which is still about 70 basis points above its all-time low set right before the Fed started cutting rates in September.
Zox at Brandywine said, “Politicians are willing to borrow more and more money until the market makes them obey the rules.” Since Trump is “old and in his second term,” he still thinks that some senators who are up for re-election will fight against his more expensive policies.
Statista says that after the election, stocks were going to have a big week. The Dow Jones Industrial Average (DJIA) is up 17% for the year, the S&P 500 is up 25.9%, and the Nasdaq Composite Index (COMP) is up 28.6%.
“What do we know about Trump?” Adam Abbas, portfolio manager and head of fixed income at Harris Associates, said, “Trump cares a lot about how the S&P 500 fares.”
