U.S. Treasury yields rose spiked to fresh four-month highs after Donald Trump’s presidential election win over Kamala Harris, coupled with strong Republican Congressional gains, as investors anticipated that a Trump administration with a possible GOP-controlled Congress would drive economic growth and potentially elevate fiscal spending.
The yield on the 10-year Treasury jumped over 14 basis points to 4.433%, the highest since July. The 2-year Treasury yield also rose, up by about 7 basis points to 4.274%.
The surge reflects market expectations that expansionary policies under a Trump presidency, such as corporate tax cuts and increased tariffs, could boost growth but also raise the fiscal deficit and inflation.
Higher yields typically signify investors demanding more compensation for holding government bonds amid increased spending and borrowing.
Understanding the 10-Year Treasury Bond Yield
The significance of the 10-year Treasury yield extends beyond simple returns. It is widely viewed as a reliable gauge for setting mortgage rates and reflects investor confidence levels.
When economic confidence is high, bond prices fall, leading to increased yields as investors seek out higher returns. Conversely, low confidence raises bond prices and reduces yields, as the demand for secure investments rises.
The bond market had already been moving upward, with the 10-year yield climbing 50 basis points in October alone, the largest monthly increase since September 2022. The market anticipates that further spending policies from the new administration could place additional pressure on yields.
Influence on Monetary Policy
The 10-year Treasury yield is closely watched by the Federal Reserve and other central banks, shaping decisions on short-term rates and other policy tools. A rising yield might prompt the Fed to raise rates to prevent overheating, while a falling yield could lead to more accommodative policies to support growth.
Treasury yields are increasing despite recent rate cuts by the Federal Reserve. On Thursday, the Fed continued its easing cycle with a 25 basis point rate cut, though future rate cuts may now be in doubt given the projected fiscal expansion under Trump.
According to BlackRock's weekly commentary: "With the Federal Reserve poised to cut policy rates again this week, recent solid jobs and wage data – including last week’s updates – reinforce why we do not see the central bank delivering the lower rates markets expect. We think investors are viewing structural changes through the lens of a typical business cycle – and that is driving market volatility. The European Central Bank is seen cutting rates closer to our view, one reason we prefer euro area fixed income over the U.S."
Monetary Policy is Still Restrictive, Says Powell
Despite recent positive economic data and Wednesday’s stock market rally, Federal Reserve Chair Jerome Powell stated that the central bank is continuing its pursuit of interest rate cuts as monetary policy remains restrictive.
Powell explained that the Fed considers lower borrowing costs to be necessary to fulfill its dual mandate of ensuring maximum employment and price stability.
“We think that even with today’s cut, policy is still restrictive,” Powell told reporters at a press conference following the central bank’s rate reduction.
U.S. Fiscal Policy on an Unsustainable Path
Powell also expressed concerns about the rising U.S. fiscal deficit and the sustainability of the country’s fiscal policy.
“The federal government’s fiscal path, fiscal policy, is on an unsustainable path,” Powell said. “The level of our debt relative to the economy is not unsuitable, the path is unsustainable.
“And we see that in a very large deficit, you’re at full employment [and] that’s expected to continue, so it’s important that be dealt with,” Powell added. “It is ultimately a threat to the economy.”
Despite these concerns, Powell said he was not overly worried about the economy, even though one inflation report had come in "a little higher than expected".
He noted that more data would be available by December, allowing for a better assessment. "Overall, [we’re] feeling good about economic activity," he concluded.
Global Economic Outlook
While IMF declared that the "Global battle against inflation is almost won" in its latest World Economic Outlook report, it noted that "Downside risks are rising and now dominate the outlook: an escalation in regional conflicts, monetary policy remaining tight for too long, a possible resurgence of financial market volatility with adverse effects on sovereign debt markets a deeper growth slowdown in China, and the continued ratcheting up of protectionist policies".
Amid this backdrop, several central banks around the world are delivering outsized rate cuts: The RBNZ and BoC cut 50-basis points at their latest meetings, declaring victory over inflationary pressures as it fell back within target ranges, while the Bank of England cut by 25 basis points.
In Australia, however, underlying inflation metrics remain solidly above the RBA's target range, pushing out the rate-cut timeline to 2025.
RBA policymakers held rates steady at 12-year highs of 4.35% in October, with Bullock noting that "Underlying inflation in the September quarter is still too high. While trimmed mean inflation declined to 3.5% over the year, it was little changed at 0.8% in the quarter.
“This time last year, trimmed mean was at 5.2%. So, we have made good progress. But as we’ve seen throughout the year, this last part of the job of getting inflation down is not easy or straightforward.”