Are financial markets having second thoughts about Donald Trump? Paul Krugman suggests rising US bond yields reflect an “insanity premium”, with the bond market “starting to suspect that Trump really is who he seems”.
Krugman cites a recent note from Apollo’s Torsten Slok, which doesn’t refer to Trump but which notes it’s “highly unusual” that bond yields have spiked even as rates are being cut. “The market is telling us something”, says Slok.
JPMorgan’s Michael Cembalest is also eyeing bond yields, saying US 10-year yields will be the “ultimate barometer” of Trump’s plans.
If benefits from deregulation and tax cuts overpower the inflationary impact of tariffs and large deficits, yields should stay between 4.5 and 5 per cent, but a persistent and meaningful rise above 5 per cent would suggest things have “gone very wrong”.
Cembalest thinks stocks will ultimately end 2025 higher, but expects a bumpy ride, with a 10-15 per cent correction likely.
Why? Firstly, such corrections are common. Secondly, valuations leave “little room for error”. Thirdly, investors have generally given the “alchemists” – Trump White House nominees looking to shake up the US – the benefit of the doubt, but Cembalest is cautious.
Their policies and statements indicate they want to “break” something, he says, whether it’s globalisation, the Federal bureaucracy, the FBI, US vaccine policy, or something else. His conclusion: “Whatever the goals, I take the Alchemists at their word: they are going to break something, I just don’t know what.”
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