In the immediate aftermath of Trump’s victory, markets reacted predictably with higher Treasury bond yields, stronger equities, and a firmer dollar, reminiscent of the 2016 post-election response.
By Thursday morning (AEDT), Treasury yields continued to climb as traders scaled back expectations for substantial Federal Reserve rate cuts over the coming year.
The benchmark 10-year Treasury yield rose to 4.479 per cent, its highest since July.
Drawing from trends during Trump’s previous term, 10-year yields are forecast to increase by another 100 basis points over the next year or two, potentially reaching a nominal yield of 5.5 per cent, as the bond market braces for stronger growth and rising inflation.
As markets react, Australian economists are bracing for impact as Trump’s return to the White House looms large. The potential for new tariffs is likely to squeeze Australia’s economy through China, but beyond trade, it’s Trump’s inflationary policies that are setting off alarm bells in Australia.
Following the election, AMP’s Shane Oliver cautioned that while Trump’s tax cuts and deregulation may boost US productivity through increased investment, his policy mix – including higher tariffs, reduced immigration, and potential meddling with the Federal Reserve – could ultimately stoke inflation and curb economic growth.
“Put simply, Trump’s policies point to upwards pressure on US bond yields – via a bigger budget deficit and higher inflation and less rate cuts from the Fed,” Oliver said. “There is also the risk that if Trump’s policies boost US inflation, there could be a global flow-on, including to Australia, resulting in higher than otherwise RBA interest rates.”
Similarly, GSFM investment specialist Stephen Miller’s analysis points to several potential inflationary pressures in the US, primarily influenced by shifts in the economy and policy. With US bond yields rising on Thursday due to factors like the budget deficit and inflationary policies anticipated under a Trump 2.0 administration, there are potential global reverberations, according to GSFM’s market strategist.
“A Trump 2.0 has undertaken to embark on a high grade weaponisation of trade that will fuel inflation via aggressive tariffs. That will inevitably result in a higher spike in inflation,” he said.
Like Oliver, he agreed that Trump’s plan to exert more influence over the Fed’s decision-making process is not something bond investors are likely to look kindly upon.
“To emasculate the Fed’s independence by making the policy rate a more ‘political’ device will inevitably result in higher inflation, expectations thereof, and higher medium- and long-term bond yields,” Miller said.
But, speaking on a Relative Return Unplugged podcast episode last week, Miller also raised the possibility that Trump’s tariffs could hit Australia so hard that the anticipated burst of inflation may not materialise.
“Let’s say the US aggressively increases tariffs and then China aggressively increases tariffs … a country like Australia that is very leveraged to the international trading system, that’s disastrous for us. That might mean the economy here gets so weak that we don’t get that burst of inflation,” Miller said.
“It might mean that worldwide, we don’t get that burst of inflation. But the reason we don’t get that burst of inflation is because everyone’s gone tariff-happy, and there’s been a disastrous consequence for global economic activity.”
Gregory Peters, co-chief investment officer PGIM Fixed Income, said the inflationary impact depends on Trump’s approach to tariffs, warning that his presidency could lead to stagflation.
Namely, while maximum tariffs would provide a stagflationary shock, minimum tariffs would reduce growth and raise inflation for the first year of implementation. In the latter scenario, however, Peters expects some fiscal response from a unified government.
“A full extension of the TCJA (Tax Cuts and Jobs Act) and another cut to the corporate tax rate, likely to 15 per cent, provides marginal upside to growth. We would then expect a larger fiscal response in 2026 as the negative growth from tariffs becomes apparent and the inflation shock begins to roll off,” Peters said.
“Under a Trump 2.0 presidency, there would likely be a negative growth shock and upside inflation in response to tariffs, the level of which remains unclear,” he added.
Sebastian Mullins, head of multi-asset and fixed income at Schroders, pointed to market reactions in the wake of Trump’s election victory, noting they are clearly anticipating his policies to be largely inflationary.
Schroders, he said, views Trump’s administration as increasing the risk of inflation rising later in 2025 due to its trade and fiscal policy. Namely, the head of multi-asset and fixed income said Trump’s pledge to cut taxes and regulation further, while also raising tariffs and restricting immigration, will be “reflationary for the US economy”.
“Inflation should also prove stickier, reinforcing our conviction that the Federal Reserve will not deliver as much easing as it has indicated it will,” Mullins said. “Given our view that the neutral rate lies around 3.50, Trump’s return to the White House likely means that the Fed needs to keep rates above this level.”
While Schroders continues to see a low risk of a recession in the US and maintains its view of a soft or even no landing, Mullins noted that inflation remains the biggest risk next year. However, “We do not expect a return to the 8–9 per cent, but instead, a more ‘normal’ environment seen last before the 2008 financial crisis.”
