How UST yields moved last week
Long-end US Treasury (UST) yields spiked higher on Wednesday as it became increasingly clear that President-elect Trump would secure his second term in the White House. Benchmark 10y UST yields rose by 16bps to 4.43% while 30y UST yields climbed by 18bps to 4.61%. Nonetheless, long-end yields gradually fell across the rest of the week as markets digested the upcoming Trump presidency, with yields on Friday close coming in just slightly higher than before the election.
Meanwhile, short-end yields remained fairly anchored throughout the election and the Fed meeting. 3m UST yields, for instance, remained steady at 4.54% on 5 and 6 Nov, before dipping to 4.53% on 8 Nov. 2y UST yields climbed by 8bps to 4.26% on 6 Nov, before closing at 4.26% on 8 Nov after some intra-week volatility.
Chart 1: UST yields on 5 Nov, 6 Nov, and 8 Nov
A resounding Trump victory
President-elect Donald Trump is poised to re-enter the White House again after securing 312 electoral votes to Harris’s 226 while winning the popular vote - something he failed to achieve in 2016. At the point of writing, the Republicans have also taken control of the Senate and are on the brink of winning control of the House, setting the party up for a red sweep.
This red sweep may give Trump a smoother path to enact his desired policies, at least for the next two years until the mid-term elections in 2026. We provide some summarised takeaways on notable policies to expect, though we also stress that these are subject to changes as finer details of each policy are released.
1. Policies are likely to be inflationary
Trump has repeatedly proposed tariffs in his election campaign, continuing his stance from his previous Presidency. Some proposed tariffs this time include (i) an up-to-20% tariff on all imports; (ii) a 60% to 100% tariff on Chinese imports; and (iii) a 25% to 100% tariff on Mexican imports.
We expect these tariffs to be inflationary as they would increase the price of imported goods. Studies have been done in recent months to estimate this impact. A National Retail Federation study has estimated that Trump’s proposed tariffs would reduce American consumers’ spending power by $46b to $78b each year; another working paper by the Peterson Institute for International Economics estimates peak inflation at 6% to 9.3% by 2026 if a majority of Trump’s proposed policies are implemented.
While these tariffs will likely be inflationary, we think the scale of inflationary impact will depend heavily on the level and types of tariffs implemented - estimates from different economists can vary widely. Trump has been said to use the threat of tariffs as a bargaining chip in trade negotiations and may not actually implement all these proposed tariffs. In addition, he may also face resistance from pro-business Republicans, or potentially legal challenges from outside, both of which could limit the extent of his tariffs.
Apart from tariffs, fiscal policy under Trump is likely to remain expansionary. Tax cuts will likely be a big part of his economic agenda: this includes the extension of tax cuts (e.g. parts of his 2017 tax law set to expire in 2025) and the implementation of new tax cuts (e.g. exempting tips and overtime pay from income taxes). A continuation of expansionary fiscal policy could continue providing support to US inflation.
2. Fiscal deficit is likely to worsen
Trump’s proposed tax cuts are likely to hurt government revenues through lower tax revenues though there could be mitigating factors like (i) improved ‘government efficiencies’ through a government efficiency commission potentially led by Elon Musk; and (ii) using higher tariff revenues from his new tariff policies to offset lower tax revenues.
Fears of a fiscal deficit appear to have shown through higher long-end yields immediately post-election (see first section). It is once again difficult to forecast an exact numerical impact, but we think there is a decent likelihood that the fiscal deficit will continue widening over his Presidency.
3. Expect greater government pressure on the Fed
Trump (and more recently Elon Musk) has consistently said that Presidents should be allowed to influence the Fed’s policymaking. He has repeatedly pushed for lower policy rates to stimulate the economy and stock market, not only in this election cycle but also in 2019 (before COVID) when he advocated for policy rates to be cut by ‘at least 100bps with perhaps some quantitative easing’.
The Fed, especially its current chairman Jerome Powell, has pushed back against such pressure, stating that the Fed should be independent of politics to best deliver on its long-term objectives, especially regarding inflation (and inflation expectations) and the economy. In the recent Fed press conference, he stated (i) he would not resign even if President Trump asked him to; and (ii) his belief that Presidents are ‘not permitted under the law’ to fire Fed governors.
Looking ahead, we expect increased government pressure on the Fed on various issues, including rate cuts and banking regulation. However, we don’t expect any drastic moves from Trump as those would likely come with protracted legal challenges – we expect Powell will serve out his term (i.e. not be fired) until it ends in May 2026. The Fed will likely be able to keep its wait-and-see approach, rather than potentially prematurely cutting rates simply because it was directed to by the President.
4. Summary
In all, on balance (notwithstanding the many uncertainties), we think the incoming Trump presidency should (i) generally be inflationary; (ii) come with a worsening fiscal deficit; and (ii) lead to increased pressure on the Fed, but nothing too extreme. These should generally point towards yields (especially long-end yields) remaining supported or potentially climbing higher over the years on the back of structurally higher inflation.
A 25bps rate cut, as expected
Following the US election, the Fed cut rates by 25bps, in line with consensus expectations. The 25bps cut was a unanimous vote this time, unlike the previous meeting where one committee member dissented from the 50bps decision.
We provide the key highlights of the latest Fed decision below, comparing the two most recent policy statements and transcripts (Table 1). Broadly speaking, the latest messaging from the Fed reflected slightly lesser concerns on labour market conditions given recent labour market data, with the Fed continuing to look at both inflation and labour market risks. To us, the key highlight was the Fed continuing to emphasise a data-dependent approach.
Several questions in the post-Fed press conference also referenced the recent US election. We have already provided a quick overview above, but generally, the Fed has signalled it will adopt a wait-and-see approach regarding Trump’s economic policies.
Table 1: Key highlights of the latest Fed decision
| Source | September | November | Our thoughts |
| Policy Statement | Inflation has made further progress toward the Committee’s 2 percent objective but remains somewhat elevated. | Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated. | The labour market continues to be a focal point for the Fed. The inflation target has not yet been achieved, with the removal of some phrases relating to the progress towards 2%. |
| Job gains have slowed, and the unemployment rate has moved up but remains low. | Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. | ||
| The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance. | The Committee judges that the risks to achieving its employment moving sustainably toward 2 percent, and judges that the risks to achieving its employment and and inflation goals are roughly in balance. | ||
| Official Transcript | - In the labor market, conditions have continued to cool. - The unemployment rate has moved up but remains low at 4.2 percent. |
- In the labor market, conditions remain solid. - The unemployment rate is notably higher than it was a year ago, but has edged down over the past three months and remains low at 4.1 percent in October. |
The more optimistic tone of the Fed with regards to the labour market reflects slightly better data available in the November meeting, compared to that in the September meeting. |
| How the Fed will act ahead | We are not on any preset course. We will continue to make our decisions meeting by meeting. | We are not on any preset course. We will continue to make our decisions meeting by meeting. | No changes here - the Fed will continue its data-dependent approach, rather than prematurely loosening or tightening policy. |
| Source: Federal Reserve, iFAST compilations. Data as of 8 Nov 2024. Data is taken from Fed official policy statement and press conference transcript. Key points and differences are bolded/underlined by us. | |||
Higher-for-longer rates ahead, and how you should act
Our base case continues to be for higher-for-longer rates, a stance we have maintained since the start of 2024. As we head into 2025, we continue to stand behind this higher-for-longer stance, given a still-resilient labour market as well as multiple upside risks to inflation. We believe the recent Trump presidency could lead to greater inflationary pressures as well as a wider fiscal deficit, both of which could support the case for higher yields. We also note the recent move up in several long-term inflation indicators (since September) that could put further pressure on the Fed to keep monetary policy restrictive (Chart 2).
Related article: The Fed has cut rates by 50bps – what should you do?
The Fed’s latest median projections (made in September) were for end-2025 to be at 3.375%. Meanwhile, markets are pricing in slightly higher policy rates of 3.8% by end-2025. Our take is that market expectations might still be too aggressive, and consequently that terminal rates might end up even higher than expectations.
Chart 2: Longer-term inflation indicators have crept up and remain above the 2% target
What this means for your fixed income portfolio
Amidst a higher-for-longer backdrop, our recommendation continues to be for shorter-duration fixed income products. The still-inverted yield curve means that the highest yields likely continue to be found only on the very short-end, particularly under the 1y tenor - we would at least wait for the yield curve to dis-invert before adding on significant duration.
It is important to highlight that long-duration bonds need not necessarily benefit even if the Fed cuts rates in subsequent meetings. As an example, despite the 75bps worth of cuts already this year, 10y UST yields are actually up compared to at the start of the year, and compared to before the first 50bps cut in September (Chart 3). With the inverted yield curve today, we think longer-end yields are already pricing in aggressive rate cuts; assuming a normalised upward-sloping yield curve, further declines in long-end yields would require markets to price in even more rate cuts – which we argue is increasingly unlikely in the event of a Republican sweep. Investors should consider not only their rate (cut) expectations but also the shape of the yield curve today, before adding on significant duration.
Long-duration bonds also come with greater interest rate volatility which investors should be aware of. As mentioned above, rate cuts are already aggressively priced in, and there is room for things to ‘go wrong’, perhaps in data surprises or unexpected policies by Trump. Long-duration bonds are therefore susceptible to larger mark-to-market moves in response to interest rates, as we saw in the past week.
Our recommended products primarily include fixed income products under the 1y tenor. Singaporean investors seeking a short-duration exposure can consider our ‘Singapore-Centric’ recommendations: Nikko AM Shenton Short Term Bond Fund and United SGD Fund. We also think that money market funds like the Fullerton SGD Cash Fund and the Amundi Funds Cash USD can provide attractive returns for little risk.
Chart 3: UST yield changes in 2024
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a NIL position in the abovementioned securities.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.