US | Market’s rate expectations remain broadly unchanged following Trump’s inauguration

Summary

Further easing of at most 50 bps by year-end is still on the table, but the Fed will likely stay on the sidelines while the uncertainty around renewed immigration policies lingers and until it knows if Trump follows through on his plans to impose tariffs.

Key points

• Key points:
• Uncertainty appears to have peaked exactly a week before Trump’s inauguration, when the 10-year yield hit 4.8%, its highest since Oct 2023, and 120 bps above the 3.6% mid-Sep low.
• The inverted hump at the short-end of the yield curve suggests the market still expects the Fed to deliver a bit more easing before entering a prolonged pause in the rate-cutting cycle.
• High nominal yields are largely a result of higher real yields, with markets mainly factoring in increased risks around the outlook rather than simply adding higher inflation compensation.
• Markets seem to share the Fed’s view of increased risks to the inflation outlook, but the one-off nature of a tariff-driven inflation shock is unlikely to de-anchor inflation expectations.
• A tight policy stance will continue to weigh on rate-sensitive sectors, particularly real estate, while corporate-debt risk premia remain near the bottom of their historical distributions.

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