By Sarupya Ganguly

BENGALURU (Reuters) –

Donald Trump's presidential election win has forced bond strategists to materially change their outlook towards higher longer-dated Treasury yields, as the risk of a U.S. inflation resurgence escalates.

Since Trump's victory, the benchmark U.S. 10-year Treasury yield has risen nearly 15 basis points. This rise is attributed to expectations regarding his proposed policies of tax cuts and tariffs, which could increase U.S. fiscal debt by approximately $7.75 trillion over the next decade according to the Committee for a Responsible Federal Budget.

The continued resilience in U.S. economic data complicates the Federal Reserve's easing plans. The benchmark 10-year yields, which move inversely to prices, have surged over 70 basis points cumulatively since the Fed's significant September half-percentage point rate cut.

Interest rate futures are now fully priced for only three more quarter-point interest rate cuts by the end of 2025, which is half of what was predicted just a few weeks prior.

In a Nov. 8-13 Reuters survey, nearly two-thirds of the respondents (19 of 30) indicated that their overall view of longer-dated Treasury yields had materially changed since the U.S. election.

Lars Mouland, chief rates strategist at Nordea, commented, "The situation is two-fold. Initially, we were skeptical about the U.S.'s need to cut rates as much as they were saying, or as much as the market was pricing. Central banks typically cut rates during a crisis or when inflation is too low, neither of which we're currently seeing. Plus, it’s hard to argue against a lot of what Trump has proposed being inflationary. Imported goods will become more expensive, and even if substituted with American goods, which are pricier from the onset, prices will rise. Perhaps we need to revisit the highs in rates and go even higher in the long end of the curve."

POLICY CLARITY SOUGHT

Dan Ivascyn, group chief investment officer at PIMCO, told Reuters that the Treasury market selloff around the election reflected a "reflationary theme" and higher fiscal risks. However, strategists have not yet fully incorporated these concerns into their official point forecasts.

The current 10-year Treasury yield of 4.43% is expected to fall about 20 basis points to 4.25% in three months and further to 4.20% by the end of April, based on median forecasts from nearly 40 bond strategists. These forecasts represent significant upgrades from those made in October.

Jabaz Mathai, head of G10 rates and FX strategy at Citi, explained: "There are two opposing forces here for the market. One is the expectation of fiscal stimulus in 2025, which keeps an upward bias to yields. However, the labor market has been weakening and the Fed is on an easing path, pulling down yields. Between these two forces, we find ourselves somewhat neutral at current levels – 4.2% is a reasonable target in the near term."

Others in the survey mentioned the necessity for greater clarity on whether Trump's proposed policies will be fully implemented before making a definitive call on the future path of yields. Most expect the Republican Party to control both Houses of Congress as results are still pending for the House of Representatives.

Vishal Khanduja, portfolio manager at Morgan Stanley Investment Management, stated: "From here, yields will clearly look for more information not only from economic data but also from fiscal policy. We need to see more details about leadership in certain aspects of the administration as well as their focus on tax cuts or tariffs. This will give us more direction for Treasury yields."

A significant 95% of survey respondents (20 of 21) believe that the U.S. yield curve will steepen in the coming month, with 13 indicating it will be led by longer-term yields rising faster than short-term ones, or "bear steepening." Seven suggested that "bull steepening" is more likely, while one said "bull flattening."