Trump Can Enjoy Historic 10-Year Treasury Yield Throughout Second Term
Predicting what a new administration might mean for the economy and the markets.
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Friday is the last trading day before a new administration is inaugurated on Monday. After an initial rally on election results in early November, the market has largely given back those gains. So, what will new leadership mean for the economy and the markets? I will take a stab at that question in this column.
The new administration’s largest challenge seems intractable to a large extent. That is the massive federal debt that stands north of $36 trillion with fiscal deficit expanding at an approximate $8 billion daily rate in the first three months of the government’s fiscal 2025 year. This has been a key driver of the recent rise in treasury yields. The administration will begin in office with the yield on 10-year treasury near 4.6% and the annual tab to service the federal debt at just north of $1 trillion. Given the debt load, I could see the yield on the 10-year treasury remain above 4%, outside of a significant recession, throughout President Trump’s second term. While that is hardly a historic anomaly, it would be the first time this has occurred this century.
I also think this economic scenario is hardly priced into the current market. Some valuation metrics (for example, price-to-sales ratio) are more stretched than they were at the end of the Internet Boom. Higher mortgage rates will remain a huge headwind to the housing sector, and I expect delinquency and default rates on loans connected to commercial real estate to continue to rise in 2025 as they did throughout this past year. 2023 and 2024 saw the lowest number of existing home sales since 1995, and I think 2025 will make that a trifecta as mortgage rates stay elevated and housing affordability remains near historical lows.
I also believe investors will see a slew of executive orders next week that will impact numerous regulations and other policies. I expect immigration levels to drop dramatically as previous policies like "Remain in Mexico" get reinstated. What impact that has on the job market, especially on industries like meat packing that heavily use this sort of labor is unknown. Another major uncertainty relates to tariffs and trade policies. Things will change on this front, but the question is how significantly and what impacts those changes will have on imports, the trade balance and global supply chains. It is also likely to be an on and off again source of volatility for equities throughout 2025.
Then we have potential changes on the legislative front. The new administration’s party has a razor-thin majority in the House of Representatives, the narrowest since 1931. If they push minor legislative changes, they should be successful in using the reconciliation process to enact some new legislation. If the House tries to push through a massive package including making the whole of the tax cut package of 2017 permanent, that may prove to be a bridge too far. This is going to be a major battle to watch in 2025.
Ending on an optimistic note, I am hoping the recent progress in Gaza bodes well for some sort of peace settlement in Ukraine at some point in 2025. Ending the largest land war in Europe since World War II, as well as the senseless killing, would make 2025 a memorable year in and by itself.
At the time of publication, Jensen had no positions in any securities mentioned.
