Bond Vigilantes Are Still Hibernating as the Market Sizes Up Trump 2.0

Donald Trump’s pledges to slash taxes, crack down on ­immigration and impose steep tariffs have long stirred concern that his policies may widen the budget deficit and fuel inflation, sparking higher interest rates and bond yields. That would be bad news for bond investors, since prices fall when yields rise. But by all measures, the $29 trillion US Treasury market has been relatively peaceful since Trump won the election on Nov. 5. The benchmark yield on 10-year bonds dropped to its preelection level, following an initial selloff. The so-called term premium—a measure of the perceived risk of holding long-term government debt—declined to a one-month low, according to a model by the New York Federal Reserve.

The calmness partly reflects that some worries about a too-hot economy had already been priced in before election night. Bonds had sold off steadily since mid-September, driven by ­better-than-expected economic data and rising expectations of a Republican sweep. But investors also seem to be assuming that Trump won’t follow through on his campaign promises. “No one really knows what the policies are going to be in the Trump agenda,” says Greg Peters, co-chief investment officer at PGIM Fixed Income. “The belief is that the worst part of the agenda items will be tempered, and the good parts will be amplified. That seems a little kind of hopeful in my mind.”