Industry Updates

Treasury ETFs hit by Trump inflation predictions

Analysts have predicted higher inflation in a Trump second term

Kent Thune

Donald Trump

Treasury yields have spiked markedly since late last week, as President Biden’s weak debate performance has bond investors looking more closely at what a Trump presidency would mean for inflation and interest rates.

In the three trading days since Thursday’s debate, the 10-year Treasury yield surged from 4.27 to 4.44, a 4% increase.

The rate-sensitive long bond market proxy, iShares $ 20+yr Treasury Bond UCITS ETF (IDLT), dropped more than 3% as bond prices have an inverse relationship to bond yields.

The bond market received some relief from inflation concerns Tuesday, as a speech from Fed Chair Powell assured investors that inflation was headed in the right direction.

Why is the bond market repricing inflation and rate expectations over the prospects of a Trump second term?

Why WSJ, Morgan Stanley predict Trump inflation

During Donald Trump’s presidency, from 2017 through 2020, inflation was near historic lows. So, why are Treasury yields and bond ETF prices moving so sharply over concerns about higher inflation should the former president be re-elected?

The Wall Street Journal, Morgan Stanley and 16 economists have all predicted it in the past week.

The general consensus among these various reports is that Trump’s policies, specifically those involving immigration and tariffs, are inflationary. Here is how each of these policies potentially impact inflation and the broader economy.

Trump immigration

Trump strongly opposes illegal immigration and favors a strict US-Mexico border policy. A reduction in immigration would reduce the labour supply. With less workers available, businesses may find it more difficult to fill open positions without raising wages, potentially leading to price increases across the economy.

This is particularly true in sectors that rely heavily on immigrant labour, like agriculture and hospitality. Again, another potential boost in costs that might hit consumers.

Trump tariffs

During his 2024 campaign, Trump’s tariff ideas include a 10% universal baseline tariff on all US imports and a 100% tariff on imported cars. Tariffs generally put upward pressure on prices and can contribute to inflation:

  • A tariff is a tax on imported goods. In many cases, these taxes result in higher costs that are passed on to consumers.

  • Tariffs generally curtail trade, reducing the overall supply of imported goods available in the market. With fewer imported goods, domestic producers may face less competition, potentially allowing them to raise prices without losing sales.

  • Higher prices for imported goods can also lead to higher production costs for domestically produced goods that rely on imported parts or materials. This can create a ripple effect, pushing prices up across the economy.

Some argue that the inflationary impact of tariffs might be small, especially for a large economy like the US.

However, tariffs might add to other inflationary pressures, potentially making it harder for central banks to control inflation.

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