Giant U.S. asset managers overseeing well over $20 trillion are anticipating continued price pressures because of President Donald Trump's immigration and trade policies, a scenario that will likely keep threatening the bond market this year.
Vanguard, the world's second-largest asset manager, which manages over $10 trillion, said in a first-quarter fixed income outlook report seen by Reuters that it expects "progress on inflation to stall," with core measures of price pressures stuck above the Federal Reserve's 2% target and above 2.5% for most of 2025.
Trade and immigration policies implemented by Trump's Republican administration could complicate the picture further, it said in a report written by its active fixed income team, led by Sara Devereux, the global head of fixed income group.
"While our base-case outlook is positive, we emphasize that the uncertainty created by the incoming administration creates a broader range of potential outcomes for growth, inflation, and monetary policy, both domestically and abroad," it said.
Investors are waiting for more announcements from the new administration about policies on tariffs, immigration and tax cuts. Trump, who began a second term in the White House on Monday, vowed this week to hit the European Union with tariffs and said his administration was discussing a 10% punitive duty on Chinese imports - lower than the 60% he promised during his 2024 presidential campaign.
He also said he was thinking of imposing 25% tariffs on imports from Canada and Mexico on Feb. 1.
The impact of Trump's policies on inflation and growth will depend on their scope and sequencing, said Libby Cantrill, PIMCO's head of public policy, and Allison Boxer, an economist at the bond-focused investment firm, which manages $2 trillion in assets.
But in a scenario where tariffs increase and budget deficits widen due to expected tax cuts, growth could decelerate this year while inflation rises. "In our baseline outlook, we expect modestly higher core inflation of around 20 to 40 basis points in the U.S. in 2025," they wrote in a note on Thursday. "The negative growth effects would likely be of a similar size."
Vanguard also warned about the possibly negative-growth impact of tariffs, depending on their size and distribution. "Geopolitical retaliation could increase business uncertainty and further constrain growth," it added.
RISING YIELDS
U.S. government bond yields, which rise when prices decline, have surged over the past few months, partly in anticipation of pro-growth policies under a Trump administration which could also reignite price pressures, complicating the Fed's efforts to bring inflation down to its target.
Benchmark 10-year yields declined marginally after Trump's inauguration on Monday, as his tariff talk was less aggressive than feared. Yields were last at 4.65%, down from more than a one-year high of 4.8% last week but still about 100 basis points higher from September, when the Fed started easing rates.
BlackRock, the world's largest asset manager with $11.6 trillion in assets, expects yields will keep rising due to a combination of higher inflation and rising government debt levels. It is bearish on long-term government bonds, expecting 10-year yields will keep rising above 5%.
"We have never before seen today's combination of sticky inflation, higher policy rates and high and rising debt levels," the BlackRock Investment Institute, the asset manager's research arm, said in a note this week.
"This combination represents a fragile equilibrium supporting investor demand for long-term bonds," it said.
