Look out for more volatility in the bond market. BlackRock, JPMorgan Chase, and TCW Group have all warned that the bumpy ride is likely far from over.
But also expect that the big overall trend for 2024 of rising bond prices and falling yields on hopes for aggressive interest rate cuts from the Federal Reserve is done. Rick Rieder, BlackRock’s chief investment officer for global fixed income, has told investors they shouldn’t expect bond prices to rise–and yields to fall–from here. He said the recent snapback in yields is a chance to lock in elevated yields on short-term bonds. The yield on the 2-year Treasury closed at 4.25% on Friday, November 8.
Trump’s pending policies on tariffs, taxes, and mass deportations have upended the outlook for the U.S. Treasury market. October’s losses wiped out much of this year’s gains.
Less than two months after the Federal Reserve started cutting interest rates from a two-decade high, the likelihood that Trump will cut taxes and throw up large tariffs has renewed inflation fears.
His proposal for huge tax cuts would also send the federal budget deficit soaring. And that has raised the prospect of making higher yields necessary to absorb an ever-rising supply of new Treasuries.
One scenario is “the bond market instills fiscal discipline with an unpleasant rise in rates,” Janet Rilling, senior portfolio manager and the head of the Plus Fixed Income team at Allspring Global Investments, told Bloomberg. She predicted the 10-year Treasury yield could rise back to the peak of 5% hit in late 2023, about 70 basis points above where it was Friday. That “was the cycle high and it’s a reasonable level if there is a full implementation of the proposed tariffs.” The yield on the 10-year Treasury was 4.30% at the close on Friday, November 8.
Economists at Goldman Sachs, Barclays and JPMorgan have revised their Fed forecasts to show fewer interest rate cuts in 2025. Prices in the swaps market are pricing in a reduction in the Fed’s benchmark interest rate to 4% by mid-2025. That’s a full percentage point higher than they were predicting in September. The Fed’s benchmark rate is now set at 4.5% to 4.75% after a 50 basis point cut in September and a 25 basis point reduction last week.
