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Why Trump’s Inflation Forecasts Moved Treasury and ETF Yields
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Treasury yields have risen sharply since late last week as President Biden’s weak debate performance has bond investors taking a closer look at what a Trump presidency would mean for inflation and interest rates.
In the three trading days following Thursday’s debate, the yield on the 10-year Treasury note jumped from 4.27 to 4.44, a gain of 4%. The long-term bond market, a sensitive indicator of interest rates, iShares 20+ Year Treasury Bond ETF (TLT)fell more than 3%, as bond prices have an inverse relationship with bond yields.
The bond market received some relief from inflation Concerns rose Tuesday as a speech by Fed Chairman Powell assured investors that inflation was heading in the right direction.
Why is the bond market repricing inflation and rate expectations given the prospects of a second Trump term?
Why WSJ and Morgan Stanley Predict Inflation Under Trump
During Donald Trump’s presidency, from 2017 to 2020, inflation was near historic lows. So why are Treasury yields and bond ETF prices moving so sharply on fears of higher inflation if the former president is reelected? The Wall Street Journal, Morgan Stanley, and 16 economists have all predicted This happened last week.
The general consensus from these various reports is that Trump’s policies, particularly those on immigration and tariffs, are inflationary. Here’s how each of these policies could potentially impact inflation and the economy in general:
Trump’s Immigration
Trump strongly opposes illegal immigration and supports a strict policy on the U.S.-Mexico border. Reducing immigration would reduce the labor supply. With fewer workers available, businesses could have a harder time filling vacancies without raising wages, which could lead to higher prices throughout the economy.
This is especially true in sectors that rely heavily on immigrant labor, such as agriculture and hospitality. This is another potential cost increase that could hit consumers.
Trump’s Tariffs
During his 2024 campaign, Trump’s tariff ideas include a universal 10% base tariff on all U.S. imports and a 100% tariff on imported cars. Tariffs generally put upward pressure on prices and can contribute to inflation:
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A customs tariff is a tax on imported goods. In many cases, these taxes result in higher costs that are passed on to consumers.
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Tariffs generally have the effect of restricting trade, reducing the overall supply of imported goods available on the market. With fewer imported goods, domestic producers may face less competition, potentially allowing them to raise prices without losing sales.
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Rising prices for imported goods can also lead to higher production costs for domestically manufactured goods that require the use of imported parts or materials. This can create a domino effect, driving up prices throughout the economy.
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Some believe the inflationary impact of tariffs could be small, especially for a large economy like the United States.
However, tariffs could exacerbate other inflationary pressures, potentially making it more difficult for central banks to control inflation.
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