Stocks soared to record highs following Donald Trump’s surprise victory in the presidential election, signaling relief after a long, uncertain campaign. At the same time, bond prices dropped, with the yield on 10-year Treasury bonds jumping to 4.479%, the highest it’s been in four months. While the stock market celebrated with a boost of optimism, the bond market reacted more nervously, raising concerns about how Trump’s proposed economic policies could affect the federal deficit and inflation.
Many economists believe the jump in stock prices reflects confidence in Trump’s plans for tax cuts and deregulation, which traders see as business-friendly. But for the bond market, there are serious concerns. Trump’s tax cuts and tariff proposals could lead to an even larger budget deficit and potentially spark inflation—both of which make holding government debt more risky.
Rising Bond Yields Reflect Concerns About the Deficit
The recent spike in Treasury bond yields is tied to worries about the U.S. government’s growing debt. With the federal deficit already at $1.8 trillion, Trump’s proposed tax cuts and tariffs could add to the national debt. This has bond investors nervous, as rising yields reflect their desire for higher returns in exchange for the increased risk of lending money to the U.S. government.
Jonathan Lee, senior portfolio manager at U.S. Bank, explained that bond traders are concerned about the lack of a clear plan for reducing government spending under Trump’s leadership. The yield on the 10-year Treasury bond had been climbing for weeks, anticipating the possibility of a Trump win, and on Election Day, it spiked by 0.2 percentage points—a significant move in the bond market.
Although the Federal Reserve lowered short-term interest rates the day after the election, long-term bond yields have continued to rise. This suggests that investors expect the new administration to continue with high levels of government spending, which could increase inflationary pressures.
What’s Next for Taxes and the Deficit?
Looking ahead, many analysts expect Trump and a Republican-led Congress to push to extend the 2017 tax cuts, which reduced taxes across the board but also contributed to the growing deficit during Trump’s first term. If these tax cuts are renewed, bond investors anticipate an even larger deficit—and they are becoming more concerned about the U.S. government’s ability to manage its debt.
Todd Jablonski, global head of multi-asset investing at Principal Asset Management, noted that the U.S. has been running large deficits for years, and investors are increasingly worried about the long-term impact on the country’s financial health. As the deficit grows, the risk associated with holding U.S. debt increases, which leads investors to demand higher interest rates.
During the campaign, both Trump and his Democratic rival, Kamala Harris, proposed very different approaches to the deficit. Harris called for raising taxes on the wealthiest Americans and corporations to generate more revenue, while Trump argued that cutting taxes would spur economic growth, which he believes would increase government revenue over time.
Despite Trump’s argument, many in the bond market remain unconvinced. Financial expert Jeremy Siegel of the Wharton School predicted that if the Republicans win the White House, the Senate, and the House, bond yields could rise even further as investors worry about the long-term effects of more tax cuts and deficit spending.
Conclusion
While the stock market reacted positively to Trump’s election win, the bond market remains more cautious. Rising bond yields are a sign that investors are concerned about the potential for even larger deficits under Trump’s economic policies. As his administration takes shape, the markets will be closely watching how these fiscal issues unfold in the coming months.
