U.S. Bond Yields Soar in Trump 2.0, Time to Buy U.S. Bonds?

TradingKey - The news that the new Trump administration will trigger potential inflation is everywhere, and while the market is questioning the growth dynamics of the stock market, Wall Street is making asset allocation recommendations to buy U.S. Treasuries.

Back in late 2023, the consensus across the market regarding U.S. monetary policy in the post-pandemic era was highly similar, that is, the Federal Reserve would steadily cut interest rates and drive bull markets in stocks, bonds, and commodities.

In fact, U.S. stocks, gold and other assets did perform brightly, but this happened in a general environment where rate cuts are difficult to implement and U.S. bond rates are still high.

The Fed kicked off a new easing cycle in September 2024 with an 'aggressive rate cut' of 50 basis points. After three rate cuts, the federal funds rate range has now fallen 75 basis points to 4.50% to 4.75%.

And during this period, the 10-year U.S. Treasury rate has rallied 91 basis points and is now at 4.703%. This has continued to widen the gap between market rates and the federal funds rate.

[Difference between the 10-year U.S. bond rate and the federal funds rate, source: St. Louis Fed]

President-elect Donald Trump's new administration policies of tariffs, immigration restrictions, and tax cuts are undoubtedly key drivers of the spike in U.S. bond rates, as they will increase the risk of a comeback in U.S. inflation. This then leads bond market participants to demand higher payouts or term premiums, and also raises the bar for further Fed rate cuts.

As the sell-off of U.S. Treasury bonds intensifies, more and more Wall Street institutions expect that the yield on the 10-year U.S. Treasury bond will exceed 5% this year, and some even expect it to reach as high as 6%.

Citi’s chief economist Steven Wieting said, 10-year U.S. bond rates this year, “certainly possilbe to reach a level close to 5% and five would be something that we would think would be really appealing” .

BlackRock also sees higher US Bond yields as attractive . According to BlackRock, the rise in interest rates is certainly a bit painful, but in some ways it can also be seen as a 'gift', with a lot of cash sitting on the sidelines to be put to work.

Drawing on CoStar's view of the 2025 outlook for Canadian Bonds, with benchmark rates currently high, the extra reward for taking risks, such as buying stocks or corporate bonds is relatively small. Investors should not be banking on recent rate cuts to help drive up their returns, but only help to preserve them

When Treasury yields are high enough, an allocation to bonds is sufficient to provide a cushion during a recession or equity bear market.