The Bond Market Is Flashing a Warning about Trump Tariff and Spending Plans

Opinion|Trump’s Plans Are Already Making Your Life More Expensive

If you earned about 5 percent every year loaning money to the United States government for a decade, that sounds like a pretty good deal, right? It’s near the highest return you could have received since 2008, and for now, at least, would be widely considered risk-free.

I’m sorry to tell you there are plenty of reasons this may be too good to be true. The bond market is telling us something about the dawn of the second Trump presidency, and it’s not pretty.

Fixed-income analysts and central bankers care about what’s driving the Treasury bond yield, and it’s something called the term premium. That’s the technical phrase for the amount of interest investors demand over and above where the Federal Reserve sets rates. Recently it’s been rising quickly.

The question is why. An increase sometimes suggests investors foresee a robust period of long-term growth that might require higher rates in the future to cool things down. In recent weeks, however, it appears to reflect their worries much more than their optimism.

This shouldn’t come as a surprise. Most of the policies proposed by President Trump, from tariffs to additional fiscal stimulus to deportations that tighten the labor market, are expected to add to inflation. And to the degree they are enacted, they will combine with an inflation rate that has declined rapidly, but which remains above the Federal Reserve’s target and is still higher than it was during most of the decade leading up to the pandemic. Rising long-term rates are bad for businesses and households that need to borrow, since the cost of loans such as mortgages and auto loans are directly linked to 10-year Treasury yields.

Evidence of consumer and investor worry abounds. The University of Michigan’s latest consumer survey saw expectations for longer-term inflation rise to 3.2 percent, one of the highest levels recorded since 2008. Minutes from the Federal Reserve’s December policy meeting showed that “all participants judged that uncertainty about the scope, timing and economic effects of potential changes in policies affecting foreign trade and immigration was elevated” and “the risks around the inflation forecast were seen as tilted to the upside.” Translation: There’s probably going to be more inflation.