Bonds and Fixed Income

[gfp927z]

>>> Stocks Like Trump. Bonds Like Bessent Better.


The Wall Street Journal

by Sam Goldfarb

December 9, 2024


https://finance.yahoo.com/news/stocks-trump-bonds-bessent-better-103000503.html


Things are getting political in the $28 trillion U.S. Treasury market.

Treasury yields, a crucial driver of borrowing costs across the economy, typically fluctuate with traders’ bets on short-term interest rates set by the Federal Reserve. But their biggest moves lately have been sparked by election results and President-elect Donald Trump’s pick of Scott Bessent as Treasury secretary.

The Dow Jones Industrial Average soared more than 1500 points the day after Trump’s election win, and the S&P 500 rose Friday to close at a record, its 57th of the year. Treasurys, by contrast, started to rally only after the Bessent nomination.

Here’s a look at what’s been driving the swings in Treasury yields and what that could mean about the road ahead:

Out with inflation, in with jobs

As of Friday, the yield on the benchmark 10-year Treasury note was 4.150%, in the middle of a range that has prevailed since late 2022. That is when the Fed was raising interest rates aggressively to tame inflation.

That range, however, is large. Yields, which move in the opposite direction of bond prices, have swung sharply this year as economic-data releases have sent traders shifting between worries about inflation and fears of a recession.

More recently, inflation has faded as a concern for investors, often doing little to move yields.

Jobs data have remained important. A strong report released in October eased concerns about a recession and sparked a rebound in yields. The latest report, on Friday, showed a small uptick in the unemployment rate and had a more modest impact.

Enter Trump

Now traders say Trump’s agenda of mass deportations, higher tariffs, lower taxes and looser regulations could put upward pressure on inflation and interest rates, driving down bond prices and sending yields higher.

Bond-market bets on a Trump victory intensified after a series of good polls for the former president. Yields peaked after the election, but reversed after Trump’s pick of the longtime investor Bessent as Treasury secretary.

Wall Street generally views Bessent as a safe pair of hands who could temper Trump’s populist impulses.

The path ahead

Treasury yields have climbed since September, despite the fact that the Fed has started to cut interest rates.

The main reason: Treasury yields are heavily influenced by investors’ expectations for short-term rates going forward. The cuts that the Fed has made so far were already baked into Treasury yields, and investors are now anticipating fewer cuts in the future than they had previously.

Higher Treasury yields mean steeper borrowing costs for businesses and consumers. But yields often rise because investors are optimistic that a strong economy can withstand high rates.

Potentially more destabilizing would be a climb caused by a rising term premium—Wall Street lingo for the component of Treasury yields that reflects everything other than investors’ expectations for short-term rates. That can include anything from the supply of bonds to hard-to-pin-down variables such as uncertainty about the long-term inflation outlook.

Various models show the term premium climbing sharply around the election. But those estimates fell after Trump’s pick of Bessent, underscoring the faith that investors currently have in the Treasury nominee.

<<<



---