The bond market is flashing a warning about the potential risks of inflation under a second Trump presidency. The term premium, which measures the interest investors demand over and above the Federal Reserve’s set rates, has been rising quickly, indicating worries rather than optimism.
Investors expect most of President Trump’s policies to add to inflation, and with an inflation rate already above the Federal Reserve’s target, rising long-term rates are bad for businesses and households that need to borrow. Consumer expectations for longer-term inflation have also increased, reaching 3.2 percent in the latest survey from the University of Michigan.
The Federal Reserve will find it harder to cut rates as concerns about the scope and timing of potential policy changes increase uncertainty. The new administration’s plans to widen the budget deficit could also lead to higher Treasury yields, making it more expensive for businesses and households to borrow.
Economists are concerned that the bond market is signaling a potential challenge for the economy, with rising interest rates pushing down prices and making borrowing more costly. This can have far-reaching consequences, including reduced business confidence and lower equity values.
The situation echoes a previous period in 2023, when the Treasury announced it would need to issue more debt than expected, leading to higher bond yields and a decline in equities. A negative feedback loop can form quickly, with rising borrowing costs weighing on businesses’ hiring and investment budgets.
As investors and policymakers navigate this uncertain environment, it is essential to consider the implications of the bond market’s warning. While some may hope for robust economic growth under a second Trump administration, others are concerned about the potential risks of inflation and its impact on the economy.
Source: https://www.nytimes.com/2025/01/29/opinion/trump-inflation-bonds-debt-yield.html