In late summer, the Federal Reserve expressed confidence in its interest rate cut policy. Despite an overheated economy, due mostly to Federal government job hiring, and high inflation, the Fed forecasts for more rate cuts through 2025.
The Fed’s dovish tone changed soon after the U.S. elections. With inflation still strong, the Fed must prepare for Trump tariffs of around 25%. Neither Mexico nor Canada indicated a strong retaliatory tariff against the U.S. Conversely, China started to announce a response against the U.S. that included limiting rare metal exports. China is also pre-announcing interest rate cuts and a stimulus program worth trillions of yuan.
At the time of writing, the 10-year bond yield was 4.63%, while the 30-year bond yield added 1.17% on Friday, December 27 to close at 4.82%. As a result, bond ETF investors holding TLT stock lost 11.91% YTD.
The chances are high that the bond yields will cross the psychological 5.0% yield. This contradicts the Fed’s 100 basis point cuts: on September 16, the 30-year bond yield closed at 3.94%. It added nearly 100 bps since that time.
What To Watch For Next
Trump’s inauguration on Jan. 20, 2025, is the turning point for U.S. trade. Its trading partners are unlikely to provide enough border security to satisfy the U.S. Canada and Mexico will face tariffs of up to 25%. Those countries will respond in kind, lifting inflation. That would increase bond yields further.
