Investors are piling back into bets that Donald Trump's return to the White House will drive up inflation, leading to a surge in Treasury yields. The bond market is anticipating stronger growth and potentially higher inflation, which could complicate the Federal Reserve's plans for interest rate cuts.

Investors Wager on Inflationary Policies Under Trump

Yields Surge as Investors Bet on Trump's Policies

The US government bond selloff was one of the worst in the past five years, with yields across maturities rising by nine to 17 basis points. Traders slashed wagers on the scope of interest-rate cuts by the Federal Reserve over the next year, though they still expect the central bank to cut rates by a quarter point on Thursday. The 30-year bond yield rose as much as 24 basis points to 4.68% before stabilizing after a strong auction.The moves reflect investors' belief that policies such as tax cuts and tariffs under a Trump administration will fuel price pressures. The yield on 10-year Treasuries surged as much as 21 basis points to 4.48%, the highest level since July, aided by a large block trade in futures. European bonds fared better, reflecting concern about the impact of US tariffs on the euro area's export-reliant industries.

Inflation Expectations Surge

Bets on a resurgence in US inflation were evident in the two-year inflation swap rate, which surged 20 basis points to 2.62%, the highest since April. The price action has parallels to the aftermath of the 2016 election, when Trump's victory sent inflation expectations surging and bonds sliding.The "move higher in yields is a concern from the bond market that Trump's economic policies could be inflationary," said Lawrence Gillum, the chief fixed-income strategist at LPL Financial. "This could potentially complicate the Fed's ability to cut rates as aggressively as bond markets have priced in."

Debate Over Persistence of Inflation

Freya Beamish, head of macroeconomics at TS Lombard, said the biggest topic on her clients' minds is whether the selloff in bonds is just "a taste of things to come." She noted that the question of whether Trump's policies are capable of generating persistently higher inflation is one that can be debated for the next five years.The moves also signal worries that Trump's proposals will fuel the budget deficit and spur higher bond supply. Wednesday's $25 billion auction of 30-year bonds drew 4.608%, the highest result since May, though the yield was more than two basis points lower than indicated by pre-auction trading, showing that buyers were willing to accept a lower interest rate than the market's assessment of fair value.

Policy Uncertainties May Slow Fed's Rate Cuts

JPMorgan Chase & Co. changed its forecast for interest rates, citing "policy uncertainties" that may lead the Fed to move more slowly than it otherwise would. While the bank still expects quarter-point rate cuts on Nov. 7 and Dec. 18, the new forecast is for quarterly cuts from March 2025, ending at 3.5%. Previously, it expected a cut at each meeting, ending at 3%.The bond market's reaction suggests that investors are positioning for a more hawkish Fed, with the potential for a divided Congress curtailing a Trump administration's ability to pursue its fiscal policies. Some investors already see the move higher in US yields as overdone, and they believe Treasury yields are near a peak.