Kelvin Wong, Market Strategist, Market Pulse, Oanda, confirms this likely outcome: "US President-elect Trump’s proposed deep cut on the corporation tax rate from 21% to 15% is likely to further increase the US budget deficit. In addition, the proposed higher trade tariffs on Chinese and the rest of the world’s imports may also revive inflationary pressure in the US economy.”
Wong continues: “The net effect of Trump’s campaign trail proposed policies is higher longer-term US Treasury yields which the bond vigilantes have responded to in the past four weeks.”
CNBC reports that the Federal Reserve chair, Jerome Powell said he will not step down if Trump asks for his resignation. “Not permitted under the law,” Powell told reporters at a news conference, after the Fed cut interest rates by a quarter percentage point.
The focus of the latest FOMC meeting was on the Fed’s latest guidance on the pace of future rate cuts. On that front, the FOMC has chosen not to commit to a certain path of rate cuts, preferring to await further details on the Trump administration’s policies before making a firmer decision says Choo Chian, Director, Multi-Asset Strategy, UOB Asset Management.
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“Our view is that Trump’s pro-fiscal stimulus stance means that there is an increasing risk of the US Fed needing to slow down its monetary easing to counter the effects of fiscal stimulus from the Trump administration. There are increasing risks that rate cut expectations in 2025 could be reduced. We expect interest rate volatility in 2025 to remain high, due to the mix of market expectations for continued rate cuts and potential inflationary policies (such as Trump’s policies on tariffs and tax cuts),” Choo says. Equity investors should stay invested as they would continue to benefit from continued gains in 2025, but bond investors need to be cautious, he adds.
To take a step back, the start of the current the Fed’s interest rate cut cycle on Sept 18 saw a jumbo 50 basis points (bps) cut on the Fed funds rate. Despite this, the longer-term 10-year US Treasury yield traded higher and rallied by 88 bps from 3.60% on Sept 17 to 4.47% on Nov 5.
“A bullish breakout with a daily close above 4.49% on the 10-year US Treasury yield may see further upside to revisit the 5% to 5.20% major resistance zone which in turn can potentially assert downside pressure on the 2-year and 10-year yield spreads between Australian government sovereign bonds and US Treasuries,” Oanda’s Wong cautions.
