by Michael Mackenzie
In the bond market, Donald Trump’s first week, at least, turned out far less destabilizing than feared. Traders hope the same goes for the latest shift from the Federal Reserve.
The US central bank is widely expected to hold interest rates steady at the end of its two-day meeting on Wednesday, marking the first pause in the rate-cutting cycle it kicked off in September.
But yields have already jumped sharply since late last year as traders aggressively reset expectations for monetary policy on speculation that Trump’s policies will fan inflation pressures and pour fuel on an already resilient economy. That may prime the market for more relief if Fed Chair Jerome Powell underscores his typical data-dependent approach and leaves the market’s now modest rate-cut expectations intact.
“It’s going to be a year where the Fed can reduce interest rates twice, maybe once,” said Ashok Bhatia, co-chief investment officer for fixed income at Neuberger Berman, on Bloomberg TV. “If you get that from the Fed, plus a little bit of deficit stabilization, that is a pretty strong outcome for the bond market.”
The Treasury market has started to recover from what had been a deep selloff that pushed yields back toward the peaks hit in late 2023 and briefly threatened to stall the stock market’s record-hitting rally.
The turnaround began when the consumer price index release on Jan. 15 eased resurgent worries about inflation by coming in at a slightly slower-than-expected pace.
The gains held through Trump’s first week in office, when he held off on enacting any immediate tariff increases and indicated that he may seek more modest ones on Chinese imports than suggested during the campaign. That dialed back some angst about a sharp jump in import prices that would deliver another inflationary shock or unsettle the economy with a trade war.
Still, the American president gave traders fresh reason to fret over tariffs as his second week began, ordering an emergency 25% duty on all Colombian goods coming into the US, for refusing to allow deported migrants to land in the country. The Colombian government later agreed to all of Trump’s terms, according to a White House Press Secretary statement.
“The rates market felt a little precarious about a week ago, and I would argue the CPI report and President Trump’s first week has taken the edge off,” said Priya Misra, portfolio manager at JPMorgan Asset Management. She said Fed officials are “in a wait-and-see mode, and policy uncertainty remains, so I think they keep their options open.”
“A strong labor market and rising inflation typically indicate climbing bond yields, especially at the longer end of the curve as vigilantes demand more risk premium. It also suggests the Federal Reserve may need to maintain higher rates for longer to combat potential inflationary pressures from a robust economy.”
— Alyce Andres, US Rates/FX strategist. Read more on MLIV.
That holding pattern is likely to give the bond market at least a brief reprieve from the volatility that’s raced through it over the past several months. JPMorgan Chase & Co. economists said the Fed will likely take steps to avoid rattling the market by issuing guidance that’s “appropriately bland,” setting up what “should be a boring start to a tumultuous year.”
How the rest of 2025 plays out will hinge heavily on Trump. While he moved quickly during his first week with executive orders on hot-button political issues, bond traders are still waiting for his approach to ones that could affect the Fed’s path. That includes his tariff plans, the scale of his proposed tax cuts and how aggressively he will try to deport those in the country illegally, which could squeeze an already tight labor market.
On Friday, the attention will shift to the Fed’s favored inflation gauge, the personal consumption expenditures index. It’s expected to show a small acceleration in price hikes by increasing 2.5% from a year earlier, up from 2.4% in the previous month, according to the median forecast of economists surveyed by Bloomberg.
Some of the positioning in the options market points to the lack of consensus. Last week, some traders hedged the risk that the 10-year Treasury yield will jump to around 4.85% — or even 5.5% — by next month. Others bet on it easing to 4.1% within a couple of months.
The 10-year Treasury yield fell three basis points to 4.59% in Asia trading Monday. While that’s down from the peak of 4.8% hit earlier this month, it’s still about a full percentage point higher than it was in September, despite the Fed’s interest-rate cuts since then.
“It’s a Trump-dependent Fed, economy and news cycle,” said George Catrambone, head of fixed income at DWS Americas, who said the 10-year yield could push higher again. “The bond market wants to be compensated for Trump uncertainty.”
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