iStock; BI
Bond yields are soaring after Donald Trump's reelection, suggesting that US borrowers might not get the relief they've been hoping for as Trump's policies have the potential to complicate the Federal Reserve's interest rate plans.
The 10-year US Treasury yield surged 18 basis points on Wednesday morning to 4.477%, representing the highest level since July 1. It's surged 76 basis points since the Fed launched its first interest rate cut of the cycle in mid-September.
Longer-term yields also spiked, with the 30-year US Treasury yield jumping as much as 24 basis points for its biggest move higher since March 2020.
Treasury yields influence the pricing of consumer and corporate debt, and the latest moves higher will put pressure on consumer borrowers who want to take out a mortgage to buy a house or an auto loan to buy a car.
The average 30-year fixed mortgage rate — which closely tracks the 10-year Treasury yield — has been creeping up toward 7% and is likely to eclipse that level if Wednesday's yield surge holds.
That would send mortgage rates back to the levels they were at this summer, dimming hopes for potential home buyers to see some improvement in affordability.
The surge in bond yields is being driven by the expectation that Trump's policy proposals, like broad tariffs, tax cuts, and the deportation of millions of immigrants, would be inflationary, driving up prices and wage growth. That would cause the Fed to change its road map for further interest rate cuts as prices and wage growth once again creep up.
"The Federal Reserve may take the view that if fiscal policy is going to be loosened relative to their previous baseline forecast then it needs to run monetary policy tighter, implying a higher neutral interest rate to keep inflation at its 2% target," James Knightley, an economist at ING Economics, said.
While markets expect the Fed to proceed with a 25 basis point interest rate cut at its meeting on Thursday, the chances of another 25 basis point rate cut in December dropped to 66% on Wednesday from 77% on Tuesday, according to the CME's FedWatch Tool.
Economist Derek Tang of LH Meyer/Monetary Policy Analytics said the Fed could already be recalibrating monetary policy to adapt to the expectations of a second Trump term.
"Their psychology might be, 'By cutting a little bit more slowly, that gives us a little bit more time to observe what's actually happening with inflation expectations and the labor market,'" Tang said.
Trump himself strongly advocated for the Fed to cut interest rates aggressively during his first term as President, and also said during his campaign that the President should have a say in monetary policy.
With Fed Chairman Jerome Powell's term set to end in May 2026, the nomination of a new Fed chair who is open to lowering interest rates despite the potential for higher inflation could occur.
"President Trump has an easy pathway to nominating and installing a candidate that is more willing to accommodate his views on interest rate policy," ING's Knightley said.
