Immediately after Trump’s victory, markets reacted predictably with rising Treasury yields, stronger stocks and a firmer dollar, reminiscent of the 2016 post-election response.
On Thursday morning (AEDT), Treasury yields continued to rise as traders downgraded their expectations for substantial rate cuts from the Federal Reserve over the coming year.
The benchmark 10-year Treasury yield rose to 4.479 percent, its highest since July.
Building on trends from Trump’s previous term, 10-year yields are expected to rise another 100 basis points over the next two years, potentially reaching a nominal yield of 5.5 percent, as the bond market is preparing for stronger growth and higher inflation.
As markets react, Australian economists are preparing to make an impact as Trump’s return to the White House looms. The possibility of new customs duties risks forcing the Australian economy to go through China, but beyond trade, it is Trump’s inflationary policies that are triggering alarm in Australia.
After the election, AMP’s Shane Oliver warned that while Trump’s tax cuts and deregulation could boost US productivity through increased investment, his policy mix – including higher tariffs , reduced immigration and possible interference with the Federal Reserve – could ultimately fuel inflation and dampen economic growth. .
“Put simply, Trump’s policies portend upward pressure on US bond yields – via a larger budget deficit, higher inflation and fewer rate cuts from the Fed,” Oliver said . “There is also the risk that if Trump’s policies stimulate inflation in the US, there will be a global flow, including to Australia, resulting in higher interest rates than the RBA.”
Similarly, analysis from GSFM investment specialist Stephen Miller highlights several potential inflationary pressures in the United States, primarily influenced by changes in the economy and politics. With US bond yields rising on Thursday due to factors including the budget deficit and anticipated inflationary policies under the Trump 2.0 administration, there are potential knock-on effects globally, according to GSFM’s market strategist.
“A Trump 2.0 has set out to embark on a high-level trade weaponization that will fuel inflation through aggressive tariffs. This will inevitably lead to higher inflation,” he said.
Like Oliver, he agrees that Trump’s plan to exert more influence over the Fed’s decision-making process is not something bond investors are likely to like.
“Emasculating the Fed’s independence by making the policy rate a more ‘political’ device will inevitably lead to higher inflation, inflation expectations and bond yields in the medium to long term,” Miller said.
But, speaking on an episode of the Relative Return Unplugged podcast last week, Miller also raised the possibility that Trump’s tariffs could hit Australia so hard that the expected burst of inflation would not materialize.
“Let’s say the United States aggressively raises tariffs and then China aggressively raises tariffs…a country like Australia that is very reliant on the international trading system, that’s disastrous for us . That could mean the economy here becomes so weak that we don’t get that burst of inflation,” Miller said.
“That could mean that around the world we won’t get this explosion of inflation. But the reason we’re not getting this explosion of inflation is because everyone is happy with the tariffs, which has had disastrous consequences for global economic activity.”
Gregory Peters, co-chief investment officer of PGIM Fixed Income, said the inflationary impact depends on Trump’s approach to tariffs, warning that his presidency could lead to stagflation.
Indeed, while maximum tariffs would cause a stagflationary shock, minimum tariffs would reduce growth and increase inflation during the first year of implementation. In the latter scenario, however, Peters expects some fiscal response from a unified government.
“A complete expansion of the TCJA (Tax Cuts and Jobs Act) and a further reduction in the corporate tax rate, probably to 15 percent, would provide some slight upside to growth. We would then expect a larger fiscal response in 2026, as negative tariff growth becomes apparent and the inflationary shock begins to ease,” Peters said.
“Under a Trump 2.0 presidency, there would likely be a negative growth shock and rising inflation in response to tariffs, the level of which remains uncertain,” he added.
Sebastian Mullins, head of multi-asset and fixed income at Schroders, highlighted market reactions following Trump’s election victory, noting that they clearly expected his policies to be largely inflationary.
Schroders, he said, sees the Trump administration as increasing the risk of higher inflation later in 2025 because of its trade and fiscal policies. The head of multi-asset and fixed income said in particular that Trump’s pledge to further cut taxes and regulations, while raising tariffs and limiting immigration, would be “reflationary for the American economy.
“Inflation is also likely to prove more stubborn, reinforcing our belief that the Federal Reserve will not do as much easing as it has indicated,” Mullins said. “Given our estimate that the neutral rate is around 3.50, Trump’s return to the White House likely means the Fed will need to keep rates above that level.”
While Schroders continues to see low risk of a U.S. recession and maintains his view of a soft landing or even no landing, Mullins noted that inflation remains the biggest risk next year . However, “we are not expecting a return to the 8-9 percent, but rather a more ‘normal’ environment seen before the 2008 financial crisis.”
