What else Trump going to the White House might mean for global bond yields

Donald Trump’s US election victory has fueled concerns about higher prices, prompting strategists to rethink the outlook for global bond yields and currencies.

It is widely believed that the president-elect’s promise to introduce steep tax cuts and tariffs will boost economic growth – but widen the fiscal deficit and fuel inflation.

Trump’s return to the White House is seen as likely to throw a wrench in the Federal Reserve’s rate-cutting cycle, potentially keeping an upward bias in Treasury yields. Bond yields tend to rise when market participants expect higher prices or large budget deficits.

Alim Remtulla, head of foreign exchange strategy at EFG International, said it was “impossible” for the Fed to continue its easing plan while yields are rising.

“Ultimately, either the Fed will have to pause rate cuts because the economy is not at risk of a recession or the economy will be and produce will implode during a recession,” Remtulla told CNBC via email.

“Trump’s election increases the likelihood of a trade war and increased fiscal spending at cross purposes,” he said.

The yield on the benchmark US 10-year Treasury has risen sharply since Trump’s election victory over Democratic candidate Kamala Harris in early November, before paring gains in recent days.

The 10-year Treasury yield traded more than 3 basis points higher at 4.4158% on Wednesday morning. Yields and prices move in opposite directions. One basis point equals 0.01%.

“In Europe, there is a slight reprieve in the data that is not as expected but also in the realization that Trump’s policies will take a quarter or two to implement,” said Remtulla EFG International.

“There is also the possibility that the rhetoric comes out of the Trump campaign for electoral purposes and that he will rule closer to the status quo. This will also help the euro zone to avoid recession and lift (in euros),” he added.

Germany’s 10-year bond yield, the benchmark for the euro zone, stood at 2.337% on Wednesday, slightly lower for the session. The yield on 2-year bunds, meanwhile, rose by around 1 basis point at 2.151%.

Shannon Kirwin, associate director of fixed income ratings at Morningstar, said a significant portion of investors were hoping for European bonds to continue to rise “quite well” in the coming year, when the euro is expected to weaken.

“Even before the U.S. election, the consensus among the bond fund managers I spoke to was that the European bond market offered more attractive value than the U.S. market,” Kirwin told CNBC via email.

“As a result, many managers have made their portfolios slightly tilted towards European credit and away from US corporate bonds,” he added.

In an effort to raise US revenues, Trump has suggested imposing a 20% tariff on all goods imported into the country, with a tariff of up to 60% on Chinese products and one of up to 2,000% on vehicles built in Mexico. .

As for the European Union, meanwhile, Trump said the 27-nation bloc would pay a “big price” for not buying enough American exports.

“We’re hearing managers in both markets say they prefer to keep their powder dry – for example by increasing quality or choosing to hold more cash than usual – in order to take advantage of potential volatility down the road,” added Kirwin.

Sameer Goel, head of global emerging market research at Deutsche Bank, told CNBC’s “Street Signs Asia” on Tuesday that the risk of escalating higher US inflation under a second Trump presidency appears to have been priced in.

Asked how Trump 2.0 could affect Asian economies and regional currencies, Goel said it could lead to an inflationary gap between the US and Asia, which in turn could lead to weakness in other currencies.

“I think, as usual, it’s a different stroke in terms of central banks and countries, but I think there’s more trajectories than balance here because rates may become more disruptive and hurt growth,” Goel said.

“On the other hand, it may be that inflation depends on where energy prices go or alternative issues like currency weakness, which can have a feedback effect for some countries more than others,” he said.

For Asian currencies, analysts at MUFG said investors had not fully priced in the potential scale of US tariffs in China and elsewhere.

A 60% tariff for Chinese products, for example, requires a 10% to 12% depreciation of the Chinese yuan against the US dollar, analysts at MUFG said in a research note published on November 7. They warned of the potential for tariff retaliation. it could get worse and there is also the risk of other countries raising tariffs on Chinese products.

Asian currencies with higher exposure to China are considered more vulnerable to Trump’s tariffs, analysts at MUFG said, citing the Singapore dollar, Malaysian ringgit and South Korean won.

Strategists at Dutch bank ING said in a research note published earlier this month that there is a tendency in financial markets to make “a lot of guesswork” about possible outcomes.

“Our advice is not to overthink and instead take a firm view that the new administration’s plan for a looser fiscal and tighter immigration policy, when combined with higher US tariffs and protectionism, all make a strong case for a dollar rally,” strategist ING said in a note published on November 13.

“Yes, the US economy can overheat – but 2025 should be the year when more air is pumped into the potential dollar bubble,” he said.

European currencies, meanwhile, are expected to underperform.

The strategists at ING said that they estimate the peak of the risk premium from the end of next year, which means that even if the euro can retain the upper parity with the US dollar before, “we see all the conditions for a structural change from 1.05-1.10. range of 1.00-1.05” next year .

Scandinavian currencies such as the Swedish krone and Norwegian kroner may be vulnerable to downside risks, ING said, while the British pound sterling and the Swiss franc are poised to “outperform” the euro.