Traders shift focus to Fed as Trump’s tariff stance creates uncertainty.

In the bond market, the initial week of Donald Trump’s presidency proved to be less destabilizing than anticipated. Traders are optimistic that the same outcome will apply to the Federal Reserve’s recent policy shifts.

The US central bank is anticipated to maintain interest rates at the conclusion of its two-day meeting on Wednesday, marking its first pause in the rate-cutting cycle initiated in September.

However, yields have surged significantly since late last year as traders recalibrate expectations for monetary policy, speculating that Trump’s initiatives will heighten inflationary pressures and energize an already robust economy. This could set the stage for further market relief if Fed Chair Jerome Powell emphasizes his usual data-dependent stance and maintains the market’s now modest rate-cut anticipations.

“This year could see the Fed reduce interest rates twice, perhaps once,” stated Ashok Bhatia, co-chief investment officer for fixed income at Neuberger Berman, during an appearance on Bloomberg TV. “If we achieve that from the Fed, combined with some stabilization in the deficit, it would represent a significant positive outcome for the bond market.”

The Treasury market has begun to rebound from a significant selloff that had driven yields back towards late 2023 peaks and momentarily threatened the stock market’s record-setting rally.

The shift was initiated by the release of the consumer price index on January 15, which alleviated rising inflation concerns by posting a slightly slower-than-expected increase.

The positive trend continued throughout Trump’s first week, during which he refrained from implementing immediate tariff hikes and suggested he might pursue more moderate tariffs on Chinese imports than previously indicated during his campaign. This reduced fears of a sharp rise in import prices that could trigger another inflationary shock or provoke a trade war.

On Monday, however, President Trump raised new concerns for traders regarding tariffs in Asia by imposing an emergency 25% duty on all Colombian goods entering the US, set to escalate to 50% within a week.

“A week ago, the rates market felt a bit unstable, but I would argue that the CPI report and President Trump’s initial week in office have eased some of that tension,” remarked Priya Misra, portfolio manager at JPMorgan Asset Management. She added that Fed officials are currently in a “wait-and-see” mode, and ongoing policy uncertainty suggests they will keep their options flexible.

What Bloomberg strategists say…

“A robust labor market coupled with rising inflation typically signals increasing bond yields, particularly at the longer end of the curve as market participants demand a higher risk premium. This scenario also indicates that the Federal Reserve may need to sustain higher rates for an extended period to counter potential inflationary pressures stemming from a vigorous economy.”

— Alyce Andres, US Rates/FX strategist.

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This holding pattern is likely to provide the bond market with a temporary respite from the volatility that has characterized it over the preceding months. Economists at JPMorgan Chase & Co. noted that the Fed is expected to adopt a strategy to avoid unsettling the market by issuing guidance that is “appropriately bland,” leading to what “should be a mundane start to a tumultuous year.”

The unfolding events of 2025 will largely depend on Trump. While he swiftly enacted executive orders on contentious political topics during his first week, bond traders are still awaiting his strategies concerning issues that could impact the Fed’s course. This includes his tariffs, the magnitude of his proposed tax cuts, and his aggressive stance on deportation, which could tighten an already strained labor market.

This Friday, the focus will shift to the Fed’s preferred inflation measure, the personal consumption expenditures index, which is projected to show a modest increase in price growth of 2.5% year-over-year, up from 2.4% the previous month, based on the median economist forecast surveyed by Bloomberg.

Recent positioning in the options market indicates a lack of consensus. Last week, some traders hedged against the possibility that the 10-year Treasury yield might spike to around 4.85% — or even 5.5% — by next month, while others speculated on a decline to 4.1% within the ensuing months.

As of Monday, the 10-year Treasury yield decreased by four basis points to 4.58%. Though that is down from the peak of 4.8% earlier this month, it remains approximately a full percentage point higher than the level in September, despite the Fed’s interest-rate cuts since then.

“The bond market is influenced by a Trump-dependent economy and news cycle,” stated George Catrambone, head of fixed income at DWS Americas, adding that the 10-year yield could again rise. “The bond market seeks to be compensated for uncertainty surrounding Trump.”

© 2025 Bloomberg

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