The Trump Yield Rally

Fourth Quarter 2024 – The Trump Yield Rally

The fourth quarter saw a rise in yields across the Treasury curve from intermediate to out long. Surprisingly, the rise in yields started before the end of the third quarter; and really, the Fed’s initiation of shorter-term interest rate cuts on September 18^th marked the beginning of the rise in yields. 

Below is a graph showing the fall and rise in the ten-year Treasury yield, overlaid with the betting odds of a Trump victory in the election. You can see the drop in yields and odds that coincided with President Biden’s stepping off the ticket, Harris’s stepping in, and election polls narrowing. Then, they both reverse in mid-September, and you can see the climb in yields up to the election. The outcome of the election combined with the Republican sweep of the Senate and House of Representatives created an investor expectation of unchecked spending and potential inflation.

The second chart shows the yields (both Treasury and AAA Muni) at the beginning of the year, the end of the third quarter, and now. Yields peaked last April, with the ten-year Treasury yield at 4.70% amidst some stronger jobs data and so-so inflation numbers. Yields declined during the summer, as we described above, but have recently elevated with the election. The rise in Muni yields has been a little more muted, as many issuers moved up issuance into September and early October to get in front of the election. Hence there has not been much new-issue supply during the recent sell-off.

Let’s also take a look at inflation. The chart below shows the trailing 12-month CPI, and PCE at the end of last year, the end of the third quarter, and now. There has been progress on the inflation front since the end of last year (when the ten-year Treasury bond yield was 3.88%). In the Federal Reserve’s eyes, there needs to be more progress on downward movement in inflation. This is why there was lukewarm-at-best guidance towards future Fed rate cuts last week, when the Fed DID cut 25 basis points but threw cold water on the cut by saying that they would be much more judicious moving forward.

Here’s a quick look at the ten-year bond yield compared to the various inflation numbers at the end of last year and where we are now. There is no question that REAL yields are higher. In our view that makes bonds more attractive at the margin as we head into 2025.

We hope everyone has a joyous holiday season, and thanks for being along for the ride. 

John R. Mousseau, CFA
Chief Executive Officer & Director of Fixed Income
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