U.S. President Donald Trump is discovering – yet again – just how unforgiving and powerful bond markets can be.
A global selloff has swept through sovereign debt markets, as rising inflation has driven yields on long-dated bonds to their highest levels in decades.
The 30-year U.S. Treasury yield on Wednesday hit 5.20%, the highest since 2007, and BNP Paribas analysts forecast a “de-anchored rise” toward 5.50% and perhaps even beyond.
This debt rout has been accompanied by a dramatic repricing of the Federal Reserve’s reaction function, with traders now attaching an 80% probability to a rate hike by December. Before the Iran war, they were positioning for two or three rate cuts this year.
The U.S. isn’t alone. The 30-year gilt yield on Monday nudged up to 5.90%, the highest since 1998. The UK bond selloff has been fueled not only by inflation fears but also by growing alarm over the country’s fiscal outlook.
This is already having political implications. Andy Burnham, the mayor of Manchester, who is widely seen as the frontrunner to replace embattled Prime Minister Keir Starmer if a leadership contest arises, this week backtracked on an earlier pledge to relax the government’s fiscal rules if he wins.
Trump may seem to have little in common with a left-wing mayor from the north of England. But the inflationary surge and rates selloff have been so severe that the U.S. president now appears to be pulling back on some of his own pledges.
In recent days, Trump has tamped down his expectations that incoming Fed Chair Kevin Warsh will preside over quick and aggressive rate cuts.
In an interview with Fortune magazine published on Monday, Trump indicated he may have to wait until the war with Iran is over for interest rate cuts. “You can’t really look at the figures until the war is over,” he said.
Trump followed up on Tuesday, telling the Washington Examiner about Warsh’s approach to interest rates: “I’m going to let him do what he wants to do. He’s a very talented guy, he’s going to be fine, he’s going to do a good job.”
REALITY CHECK
It is unclear whether Trump’s softer stance on rates came from his own assessment of the current environment or from Treasury Secretary Scott Bessent. Bessent, a former hedge fund manager and one-time colleague of George Soros, has long been attuned to bond market sensibilities.
Either way, Trump appears to be accepting the reality that rates are unlikely to be cut any time soon.
Price pressures have mushroomed due to the energy supply shock triggered by the Iran war and the closure of the Strait of Hormuz, the sea route through which a fifth of global oil and liquefied natural gas supplies used to pass.
What’s more, inflation has been above the Fed’s 2% target for more than five years and is on track to top 4%. A Philadelphia Fed survey of professional forecasters points to CPI inflation averaging 6% this quarter.
BE RATIONAL
Given this backdrop, the pressure to hike rates is mounting, from the long end of the bond market and now from the short end too. The two-year yield is nearly 50 basis points above the midpoint of the fed funds target range, the widest spread in more than three years. It’s a clear sign that investors think the Fed should tighten policy now.
Tim Duy at SGH Macro Advisors argues that a “rational” Fed would be raising rates in September. But that would be less than two months before the midterm elections, and it is safe to assume Trump would not welcome that.
On the other hand, inflation is “a clear political liability” for Trump going into these elections, Duy adds, complicating the president’s calculus.
But even though Trump’s fervor for lower rates may have cooled, this shouldn’t be equated with becoming receptive to higher rates.
Trump told CNBC a month ago he would be disappointed if Warsh didn’t cut rates right away. Only two weeks ago, he posted on his Truth Social platform: “Interest Rates too high!”
For the time being, reality, in the shape of the $30 trillion U.S. bond market, is starting to bite.
(The opinions expressed here are those of Jamie McGeever, a columnist for Reuters)
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(By Jamie McGeever; Editing by Marguerita Choy)