One of the main Trump’s goals has been bringing long term interest rates down. The focus was on reducing the deficit because it impacted the long term premium. We’ve heard many times talks of the US being on an “unsustainable path” and in the long-run that leads to either higher taxes or higher “money printing”. For this reason, buyers of US debt could demand higher interest rates for the perceived future risk.
Short-term interest rates are determined by the central bank policy but long term rates are determined by the market. For long term interest rates, the market takes into account three main factors: future central bank policy, inflation expectations and future supply and demand of Treasury debt issuance.
Trump’s “strategic uncertainty” to negotiate trade barriers kind of halted the momentum in economic activity that we’ve had before this whole tariffs saga begun. As we now price in better and better conditions for global growth (as the super high tariffs get brought down), the economic activity will likely start to accelerate and the higher demand could keep inflation higher for longer and take rate cuts off the table again.
This might keep the downside in long term yields limited and lead to higher rates in the second half of 2025 before seeing them rolling over and this time making a new low.
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