US Treasuries fell sharply on Wednesday — with yields surging — as Donald Trump’s election victory led to an increase in bets on economic policy shifts that could lead to even bigger US deficits and more inflation.

US stocks, however, reached fresh record highs as investors anticipated stimulus from Trump tax cuts and deregulation plans. Tesla shares were big winners, with Elon Musk’s endorsement of Trump expected to reap rewards for the electric vehicle maker.

Bloomberg reported that the longest-maturity US government bond yield climbed as much as 24 basis points to 4.68%, the highest level since May, and remained higher by nearly 20 basis points.

Traders scaled back their bets on the size of any interest rate cuts by the US Federal Reserve over the next year — although they still expect the US central bank to cut rates by a quarter point on Thursday.

“The bond market anticipates stronger growth and possibly higher inflation,” said Stephen Dover, head of the Franklin Templeton Institute. “That combination could slow or even halt anticipated Fed rate cuts.”

The yield on 10-year Treasuries surged 21 basis points to 4.48%, the highest level since July.

JPMorgan Chase & Co. on Wednesday changed its forecast for interest rates. Economist Michael Feroli wrote: “ … policy uncertainties may lead the Fed to move more slowly than it otherwise would.”

Mark Haefele, chief investment officer at UBS Global Wealth Management, said: “The market appears to be taking a strong view on the potential inflationary impact of Trump’s policy agenda, when there is still considerable uncertainty over the extent to which it can be implemented or its actual effect on inflation.”

Bloomberg reported that US municipal bonds also plummeted in early trading on Wednesday.

REACTION:

Susannah Streeter, head of money and markets, Hargreaves Lansdown: “Fresh nervousness has been sweeping financial markets after Donald Trump’s triumphant win. His policies look set to increase inflationary pressures and swell the US deficit even further, with knock-on effects expected for the UK economy. 10-year treasury yields have jumped as traders assess the impact that the twin promises of tariffs and tax-cuts will have on the price rises and on US government debt levels.

“Gilts often move in tandem with treasuries and this special relationship is playing out today, pushing up UK borrowing costs sharply, with 10-year gilt yields rising to the highest level since the Financial Crisis in 2008. UK government bonds had already been skittish, with sentiment souring after concerns about the amount of borrowing the Labour administration was taking on.

“Now Trump’s win has piled on further pressure. Concerns about the inflationary knock-on effect of the fresh wave of tariffs promised by Trump are seeping through the markets. There is also concern that his trade policies could hold back Britain’s economic growth. The fear of a stagflation scenario emerging in some economies appears once again to be stalking markets.

“Stocks on Wall Street have reached fresh record highs as investors assess a sweet rush of stimulus from Trump tax cuts and deregulation plans. Tesla is one of the big gainers as Elon Musk’s endorsement of Trump is expected to reap rewards for the EV maker.

“Donald Trump shifted his stance on electric vehicles after winning Musk’s support, and although it’s still highly unclear what would happen to subsidies for EVs, it’s likely a more conciliatory policy will be incoming. He’s likely to want to keep Elon Musk onside and if the promised government advisory role comes through Musk will wield more influence.

“The FTSE 100 has erased gains as bond market volatility has taken off, and investors have switched their focus to concerns about the macro-economic environment. If Trump’s most radical plans for tariffs are imposed there are deepening concerns about the knock-on effect on the UK and other European economies.

“The impact of interest rates potentially staying higher-for-longer is weighing heavily on housebuilders, given how it’s likely to seriously affect buyer affordability and their ability to swallow price hikes. Persimmon and Taylor Wimpey and Barratt Redrow are among the top fallers on the FTSE 100. Mining stocks are also losing ground sharply amid concerns about the implications of Trump’s tariffs plans on global growth and demand for metals and minerals.

“However, with sterling still markedly weaker against the dollar it’s helped other global businesses hang onto some gains. A cheaper pound helps boost the revenues of companies with significant overseas earnings. InterContinental Hotel Group which has around 4,000 hotels run under its brands in the US is expected to gain from a Trump tax cut spree and the stronger dollar, making it the top gainer on the FTSE 100. Ashstead, a huge industrial equipment rental company, has also gained ground given expectations of higher infrastructure spending in the US where it makes most of its revenues.

“President Trump has been critical about the way NATO has been funded and has demanded other members start allocating much bigger parts of their budgets to defence. If he comes to power, it’s likely these calls will intensify and, unless they are met, there is the risk that the core commitment to the principle of collective security could be diluted. It’s likely that defence spending will be increased across the NATO alliance, which is set to benefit companies with ongoing military contracts. UK-listed aerospace stocks are among the gainers today, with BAE Systems up 4% in mid-afternoon trade, as investors assess they are likely to benefit from a fresh round of investment into bolstering armed forces.’’

Lindsay James, investment strategist at Quilter Investors: ” … the economic impact of this new Trump presidency is likely to be volatile. While he, and others that surround him such as Elon Musk, want to cut the size of the state, public spending is likely to remain very high and taxes kept low. Many of his measures will be inflationary and likely to lead to a rise in bond yields, putting pressure on the Federal Reserve in its quest to bring interest rates down.

“Investors have already responded to the news that Trump will regain power. Bond yields are up and the dollar has risen too as a result. Widespread tariffs will now likely be implemented, choking global trade in the meantime, while the deficit is likely to grow ever larger, at a time when markets are getting a little nervous about the sheer scale of spending. While the economy was perhaps the defining feature of this election for voters, an emboldened Trump presidency is likely to add fuel to the fire.

“While over the long-term US elections have had a minimal impact on stock markets, investors will likely see a Trump presidency as a positive for the share prices of many of America’s companies. With proposals for business tax cuts paired with steep tariffs on imports, US corporate profitability is projected to improve, although tariffs will elicit an international response and far-reaching consequences. Indeed, in our recent survey of some of the world’s largest asset managers, a Trump presidency was seen to be mildly positive for markets, compared to no change for a Kamala Harris administration – although highlighting his volatile nature, the spread of views for Trump was far greater.

“Volatility is likely to be the defining feature of this presidency. With the future of Ukraine now in the balance, and geopolitical risks seemingly increasing every day, investors will be best placed to try to block out the noise, remain invested and base their decisions on the fundamentals of corporate America, instead of the measures enacted out of the White House.”

Aaron Rock, Head of Nominal Rates at Abrdn: “The next challenge is how to trade rhetoric versus policy. Trump’s first term gave a mixed picture in this regard. We expect tax cuts to consumers and business in short order, a key plank of Trump’s populist-leaning outlook.

“Tariffs may be ratcheted up over the time, for now a threat rather than a reality. Either way, it appears very likely that yet more fiscal expansion is on the way. This does not play well with Trump’s wish to have the Fed cut rates aggressively.

“From here, we expect US Treasury yields to drift higher, versus peers, led by longer maturities.”

Peel Hunt chief economist Kallum Pickering: While a Trump victory is unlikely to influence the Federal Reserve’s (Fed) likely decision to cut rates this week – or the likely cut in December either – the tilt towards a potentially more inflationary policy mix may impede the Fed’s ability to stay the course with cuts in successive meetings through 2025.

“Critically, Trump (with Senate approval) will need to select a new Fed Chair when Jerome Powell’s term ends in 2026. While Senate approval of the next Fed chair would act as a check and balance on Trump’s ability to select an ultra-dove, he may still try to push his luck …

“So far, global financial markets have tolerated US fiscal largesse well. High deficit spending has underpinned strong growth at tolerable levels of inflation. Aided by the so-called tech trade, there has been no shortage of global investors ready to pour money into the US.

“Despite occasional spikes in US yields which have triggered misguided fears that the bond market may be finally panicking over US deficits, the ultra-strong dollar suggests US fiscal credibility has always remained intact. The risk is that this no longer holds in case Trump triggers a serious bout of inflation in the US …”

Blair Couper, Investment Director at Abrdn: “Over the longer term, a Trump victory is likely to mean a more lax regulatory environment, escalating trade tariffs and potential attempts to repeal components of the Inflation Reduction Act (IRA).

“Markets had already been pricing in the likelihood of a Trump victory, however it is looking likely that the Republicans will take a sweep of Congress which will make it easier for the party to enact their policy agenda.  

“Under this scenario, we believe those areas that could come under pressure are companies more likely to be subject to tariff increases and areas of IRA that are easier to repeal, such as European auto manufacturers, electric vehicles, and offshore wind.

“Share prices of US companies with supply chains in China are also likely to react negatively whilst domestic manufacturing and US small and mid-cap companies are likely to outperform. With President Trump at the helm, America also faces elevated inflation risks from these policies so we’re likely to see rate sensitive sectors react and the dollar strengthen.

“Areas like financials (i.e. banks) could perform well as rates stay higher for longer. Whilst areas like real estate and growth equities would likely be negatively impacted by higher duration, it is likely that this would be offset by the positive view for markets overall from his policies so we have yet to see whether these sectors would be negatively impacted or not.”