How new U.S. policies could impact the U.S. bond market

Once it became clear the Republicans would be taking control of the Senate and the House of Representatives during the U.S. elections in November, the markets began adjusting to the fact that the new administration would have the leeway to make sweeping policy changes. The bond market was no exception.

Most of President-elect Donald Trump’s pre-election policy statements emphasized 4 key categories: trade tariffs, tighter immigration, tax cuts and deregulation. Overall, it can be argued the aim of these proposed policies is to boost U.S. gross domestic product (GDP) and economic activity. But some of these policies have implications that could cause inflationary pressures — although to what extent is yet to be determined. Current estimates range from 0.4% to close to 2% in additional inflationary pressures. Higher inflationary pressures could lead to higher interest rates, and when interest rates go up, bond prices go down.

This additional inflationary pressure would not be favourable for the bond market. Some recent headlines highlighted worst-case assumptions—including a 25% tariff on all Canadian and Mexican imports, but these seem excessive Opens a new window.. And mass deportations would reduce the availability of labour, especially for lower-wage service jobs. This could also reagitate U.S. labour shortages and cause further inflation in service prices. If we look at the core personal consumption expenditures (PCE) deflator as an inflation estimate for 2025 it’s moved up to 2.4% to 3.5% — the extreme scenario under full tariff conditions — versus the original expectation of approximately 2%. If inflation starts to increase, the U.S. Federal Reserve could find itself limited in its ability to continue cutting interest rates.

To help pay for the implementation of many of these new proposed policies, the issuance of new U.S. Government bonds may increase significantly. Interest rates are still at relatively high levels and so, at first blush, having access to new tranches of U.S. Government bonds might be positive for many investors. However, markets are far more sensitive to inflationary pressures and rising deficits than they were during Donald Trump’s first term in office. So, this could lead to upward pressure on interest rates.

Overall, the new U.S. administration’s proposed policies pose potential risks to the bond market. Although interest rates in many countries are coming down, they’re still at relatively high levels. The new administration will most likely need to finance their proposed policies by issuing new bonds. Therefore, they’ll need to carefully monitor how the bond market will respond and the impact it will have on markets and investor behaviour. This supports the idea that policy rollouts under the new U.S. administration will likely be somewhat gradual and more balanced in hopes of not drastically affecting inflation or the bond market.

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