Duration Has Left the Building
What we are seeing may be the start of a further move. The long end no longer believes.
Donald Trump has claimed victory in what he views as an emergency operation on U.S. economic health. Wall Street is now feeling the after-effects of this operation, albeit without Trump’s concern for the street’s health. Rather than be caught up thinking only about the onslaught being felt, there may be more clarity (or at least ease of stress) in focusing on where Trump is likely to turn his attention next and what trade that sets up for markets.
As noted in recent weeks, we feel Trump’s next stage will involve taxes—extending TCJA, lowering corporate taxes from 21% to 15%, and eliminating taxes on social security benefits and tips.
While this might be a welcomed development in the C-suite (who are currently trying to navigate job hiring, business strategy, and capital expenditure deployment amid the highest levels of uncertainty in recent decades), it might also kill any chance of the bond market sustaining the rally it has had so far this year.
Trump and Bessent have both signalled urgency on the tax cuts. Administration negotiators say they’ve learned from Trump’s 2017 tax cut fight to get it done as quickly as possible (we’ll take a look at what happened in 2017 later in the article). Markets didn’t take the tariff threats with equal seriousness as was realised. Maybe that’s an inherent Wall Street characteristic we will see again through this administration’s term. But we’re listening this time, and it’s the bond market that we have to make note of.
The early warning signs
The 10-year yield has been the benchmark for Trump and Bessent so far in this term, with many efforts being made to get the yield below 4%. On the day markets (well, just Trump) celebrated “Liberation Day,” the 10-year Treasury yield sat at 4.25% while the S&P 500 was trading near all-time highs around 5700. Today, the 10-year remains at 4.25%, but equities have shed over 10% in the last few days, with the S&P 500 down to 4,800s at one point (we’re now back above 5,000). For an administration purportedly focused on easing financial conditions and reducing long-end yields, this is a remarkable outcome—one that has succeeded in tightening conditions through the back door, crushing equity valuations without achieving any meaningful decline in benchmark rates. If the plan was to lower yields, it’s fair to say the market isn’t buying it.
The bond markets’ relative lack of rally through last week (and the beginning of this week) is prominent and may be a precursor of what is to come. It feels like an appropriate time to look past the tariff narrative and focus on the trade presenting itself.