Wait and see

The trajectory of US Treasury yields in the upcoming year is largely contingent upon the economic repercussions of the Trump administration's policy decisions. The administration's strategy to use tariffs as leverage in trade negotiations could lead to inflationary pressures, as tariffs typically increase prices and reduce import volumes. The actual economic impact will depend on how targeted countries respond to these measures.

The potential continuation of Trump tax cuts, combined with proposed tax eliminations, is expected to exacerbate the federal deficit, which is already nearing $2 trillion. This fiscal expansion risks drawing the attention of bond vigilantes, especially as marketable Treasury debt approaches a critical level of 100% of GDP.

The Federal Reserve's stance is another critical factor. With the Fed indicating limited rate cuts in the near future, there is potential for conflict between Trump and Fed Chair Jerome Powell, particularly if Trump seeks to influence monetary policy through alternative channels. Such actions could threaten perceptions of the Fed's independence, potentially unsettling markets.

Overall, the administration's ability to balance its policy objectives—moderating inflation, stabilizing the deficit, and maintaining confidence in central bank independence—remains uncertain. Bond traders, wary of these risks, may demand higher yield premiums as they assess the evolving economic landscape.