The US bond market is sending a warning to President-elect Trump and the new Congress: there’s no fiscal free lunch. The recent surge in longer-term borrowing costs reflects growing concerns about high fiscal deficits among global investors.
The yield on 10-year US Treasury notes has reached 4.71%, up from 3.62% in mid-September, despite a full percentage point of Fed interest rate cuts since then. Traders are positioning themselves for further rate hikes, with some predicting rates could rise above 5%.
The upward shift in longer-term rates is not driven by concerns about inflation, but rather by a rising “term premium” – the compensation investors demand for buying longer-term debt. This surge is largely due to investor wariness of looming deficits.
Federal Reserve officials expect further rate cuts this year, but the market suggests that fiscal responsibility is on their minds. The rise in rates implies that any deficit-expanding policy will come at a higher cost – in terms of interest expense and higher rates.
This warning comes as President-elect Trump’s trade and immigration policies could fuel inflation, making the Fed’s job more challenging. If the Fed keeps interest rates high to combat inflation, it may put them on a collision course with Trump’s administration.
Source: https://www.axios.com/2025/01/08/bond-market-trump-treasury