One of the surest bets when the Federal Reserve began cutting interest rates was for bond prices to rise while yields came under pressure, but that hasn’t played out according to plan. This market, which has defied so many historical patterns, has kept the pressure on bond yields up due to a variety of factors, including more persistent concerns about the federal deficit.
Donald’s Trump reelection as president has sent stocks into a furious rally mode, but according to some top institutional investors, his policies may reignite inflation, add to the deficit and keep bond yields under pressure for years to come.
That’s the view of Anne Walsh, Guggenheim Partners Investment Management chief investment officer, who said at CNBC’s Delivering Alpha investor summit on Wednesday in New York City that she was surprised by the stock rally after the U.S. elections — a concern other top investors at DA including Nelson Peltz share — but less so that stocks went up than that they went up by so much. But her bigger concern remains on the bond side of the markets.
She said investors will be “more wary” given the election rally and the pulling forward of expectations about tax cuts and regulation and expectations they will contribute to growth.
But it is in the bond market where investors should expect even more volatility. The bond market has been reacting to reflationary concerns since tax cuts would contribute to the deficit and even as the Fed makes progress on inflation the latest CPI data out Wednesday showed what she described as “stasis” in that effort.
The U.S. 10-year Treasury yield was expected to gradually decline as the Federal Reserve began cutting rates, but the bond market has defied expectations keeping yields higher than expected.
On Thursday morning, the 10-year treasury bond yield traded back near a session high of 4.483%, its highest level since July 1.
“Volatility will be with us for a while,” Walsh said.
She expects the 10-year treasury to trade between 3.5% and 4.5% for “a while,” possibly a few years, she said, though she conceded that it’s a bit of a contrarian call to expect the yield pressure to last that long.
“That’s the question for bond investors, not just the extension of tax cuts but new tax cuts and no offset with revenues,” Walsh said.
Federal Reserve Chair Jerome Powell said on Thursday during an interview at an event in Dallas that the Fed is not in a hurry to lower rates. He also said the federal budget is on an unsustainable path, but national debt does not guide Fed decision making.
Hedge fund manager David Einhorn of Greenlight Capital said at DA that he has been increasing his bets on inflation as a result of Trump policy expectations.
As CNBC Wealth Editor Robert Frank explained at DA, the total cost of extending Trump’s 2017 tax cuts and enacting new tax cuts based on campaign promises would reach roughly $10 trillion in lost revenue and the biggest offset, Trump’s tariff plans, at most are estimated to equate to roughly $3 trillion in revenue over ten years.
Trump may not be able to convince Congress to vote for a deficit-financed bill with all of the tax cuts, but Trump does have a GOP expected to be even more deferential to him in his second term and a GOP sweep on Capitol Hill, and as Rohit Kumar, co-leader of PwC’s national tax office and former deputy chief of staff to outgoing Senate Majority Leader Mitch McConnell recently told CNBC, “The arc of history here reminds us that every time long-term deficit concerns come into conflict with near-term policy, near-term wins,” Kumar said. “It’s batting about 1.000.”
Walsh says to expect elevated levels of fixed income volatility relative to equity volatility, but investors should also be aware of a worsening risk premium for stocks, she added.
