January 20, 2025 at 06:38PM
There has been considerable hand-wringing about Treasury yields in the run-up to the election. I believe it became increasingly clear that the angst is more about deficits than inflation. Breakevens have remained rangebound even as nominal yields rose.
A big part of the move is better growth and expectations of growth as well.
Certainly some of it has been deficits, in part because a Republican priority will be extending hugely-expensive Trump tax cuts and perhaps even deepening them and re-introducing SALT deductions.
None of that changed today but the big news is that Trump didn’t initiate any kind of trade war. He continued to promise tariffs in his inaugural speech but is first executive order on that front was only to investigate trade practices, including those of China, Mexico and Canada.
The market took at that as a sigh of relief and I suspect we will see lower Treasury yields when bond markets re-open. Already, we see 1-2 bps lower 10s in Canada and Europe.
The big reason is that trade wars are like real wars — expensive. If we were to get big US tariffs and big retaliation from trading partners, then governments would respond with more spending. Instead, early indications are that Trump will look to negotiations first.
Obviously, everything is subject to change with Trump and nothing is set in stone but it’s going to ‘one day at a time’ for four years, just like the first time.
This article was written by Adam Button at www.forexlive.com.
