(Bloomberg) — In bond markets, at least Donald Trump’s first week has been far less destabilizing than expected. Traders are hoping the same is true of the latest change from the Federal Reserve.
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The U.S. central bank is widely expected to hold interest rates steady at the end of its two-day meeting on Wednesday, marking the first break in a rate-cutting cycle that began in September.
But yields have already surged since the end of last year as traders aggressively reset expectations for monetary policy amid speculation that Trump’s policies will fuel inflationary pressures and add fuel to an already resilient economy. That could prompt the market to ease further if Fed Chairman Jerome Powell emphasizes his typical data-driven approach and leaves the market’s now modest rate cut expectations intact.
“It will be a year where the Fed can cut interest rates twice, maybe once,” Ashok Bhatia, one of the directors of fixed income investments at Neuberger Berman, said on Bloomberg TV. “If you get that from the Fed, plus some stabilization of the deficit, that’s a pretty strong outcome for the bond market.”
The government bond market has begun to recover from a deep selloff that pushed yields back toward the peak reached in late 2023 and briefly threatened to halt the stock market’s record rally.
The turnaround began when the release of the consumer price index on January 15 eased concerns about inflation starting to rise a little slower than expected.
The gains were sustained during Trump’s first week in office, when he held off on enacting any immediate tariff hikes and indicated he might seek more modest tariff increases on Chinese imports than suggested during the campaign. That reduced anxiety about a sharp jump in import prices that would produce another inflationary shock or unsettle the economy with a trade war.
“The interest rate market felt a little bit uncertain about a week ago, and I would say the CPI report and President Trump’s first week have taken the edge off,” said Priya Misra, portfolio manager at JPMorgan Asset Management. She said Fed officials “are on hold and policy uncertainty remains, so I think they’re keeping their options open.”
What Bloomberg Strategists Say…
“A strong labor market and rising inflation tend to point to rising bond yields, especially at the longer end of the curve as the vigilantes demand a higher risk premium. It also suggests that the Federal Reserve may need to hold rates higher for longer to combat potential inflationary pressures from a strong economy.”
— Alyce Andres, US exchange rate/currency strategist. Read more at MLIV.
That holding pattern is likely to give the bond market at least a brief respite from the volatility that has raced through it over the past few months. JPMorgan Chase & Co. economists. they said the Fed was likely to take steps to avoid jolting markets by issuing guidance that was “appropriately dovish,” setting up what “should be a dull start to a tumultuous year.”
How the rest of 2025 plays out will largely depend on Trump. Although he acted quickly during his first week with executive orders on pressing policy issues, bond traders are still awaiting his approach on those that could influence the Fed’s direction. These include 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, attention will turn to the Fed’s favored gauge of inflation, the personal consumption expenditure index. It is expected to show a slight acceleration in price increases with a 2.5% year-over-year increase, up from 2.4% in the previous month, according to the median forecast of economists polled by Bloomberg.
Some of the positioning in the options market indicates a lack of consensus. Last week, some traders hedged the risk that the 10-year Treasury yield would jump to around 4.85% — or even 5.5% — by next month. Others are betting on its reduction to 4.1% within a few months.
The 10-year bond yield held around 4.6% on Friday. While that’s down from a peak of 4.8% reached earlier this month, it’s still more than a full percentage point higher than it was in September, despite the Fed’s rate cuts since then.
“It’s a Fed that depends on Trump, the economy and the news cycle,” said George Catrambone, head of fixed income at DWS Americas, who said the 10-year yield could rise again. “Bond Market Wants to Compensate for Trump Uncertainty.”
What to watch
Economic data:
January 27: Chicago Fed Nat activity index; sale of new houses; Dallas Fed manufacturing activity; construction permits
January 28: Durable goods orders; orders for capital goods; FHFA Home Price Index; S&P Core Logic Home Prices; Confidence and expectations of conference board consumers; Richmond Fed production index and business conditions
January 29: MBA mortgage applications; previous trade balance; wholesale and retail supplies
January 30: Initial jobless claims; GDP at the annual level QoQ; GDP price index; house sale in progress
January 31: Employment Cost Index; personal income and consumption; price index of personal consumption expenditures; MNI Chicago PMI
Fed calendar:
January 29: Decision and statement from the Federal Open Market Committee meeting; Fed Chairman Jerome Powell’s press conference
January 31: Fed Governor Michelle Bowman
Auction calendar:
January 27: 13-, 26-bills; two-year notes; five-year notes
January 28: two-year floating-rate bonds; seven-year notes
January 29: Bills for 17 weeks
January 30: bills for 4, 8 weeks
— With help from Liz Capo McCormick, Ye Xie and Catarina Saraiva.
