Bond Market Weathers Fed Pause, Trump's First Week

In its first week, the bond market has largely shrugged off the initial turbulence associated with President Donald Trump's administration and the Federal Reserve's expected rate pause.

Fed on Hold

The U.S. central bank is widely anticipated to maintain interest rates steady at the conclusion of its two-day meeting on Wednesday, signaling a temporary pause in the rate-cutting cycle that commenced in September.

Yields Rise

Despite the Fed's anticipated hold, Treasury yields have surged since late 2023 due to market speculation that Trump's policies will ignite inflation and fuel economic growth.

Inflationary Pressures Ease

The January 15 release of the Consumer Price Index (CPI) offered some respite, coming in slightly below expectations and allaying concerns about resurgent inflation.

Trump's Cautious Approach

Trump's first week in office has been relatively subdued with regard to immediate tariff increases and his stance on Chinese imports, mitigating fears of a trade war and its potential inflationary impact.

Colombian Tariffs Raise Concerns

However, Trump's emergency 25% tariff on Colombian goods on Monday has reignited worries among traders.

Fed Uncertainty Persists

Portfolio manager Priya Misra of JPMorgan Asset Management suggests that the Fed is in a "wait-and-see mode," maintaining policy uncertainty and keeping options open.

Bond Market Rebound

The Treasury market has rebounded from its recent selloff, with yields retreating from late 2023 highs and volatility subsiding.

Attention on Economic Data

The personal consumption expenditures (PCE) index, the Fed's preferred inflation gauge, is scheduled to be released on Friday and is expected to show a modest acceleration in price increases.

Market Positioning

Options market positioning reveals a lack of consensus, with some traders hedging against a potential spike in the 10-year Treasury yield, while others anticipate a decline.

Trump Dependency

Market participants emphasize the interconnectedness of the Fed, economy, and Trump administration policies, noting that the 10-year yield could rise further amidst uncertainty surrounding Trump's agenda.