As of January 20th, a new administration has taken effect, along with immediate changes to the policies and priorities of the federal government.
President Trump’s second term is off to a different start than his first. In 2017, the economy was growing under historically low interest rates thanks to the rounds of quantitative easing following the 2008 recession. Now, in 2025, interest rates are higher than they’ve been in 20 years as the Federal Reserve attempts to thread a delicate needle with inflation to avoid a recession.
As 10-year treasury yields rise from a low point in July 2024, here’s why this is occurring and what signals it sends about the economic headwinds ahead.
Why the 10-Year Treasury Yields Are Rising
The 10-year yield serves as a benchmark for other interest rates and is often a key indicator of investor sentiment on the state of the economy.
There are two ways to read into the 10-year treasury yields:
- It can be a sign of economic health: prices for Treasury bonds drop when confidence is high, driving yields up as a result.
- Rising yields also signal expectations for inflation and increased rates for mortgages, corporate bonds, and other loans, resulting in downstream effects felt throughout the economy.
As of writing this, the 10-year treasury yield sits at 4.56%, down slightly from a mid-January peak but much higher than the mid-3% levels in the summer of 2024. This sudden shift reveals the economic headwinds that President Trump faces as he begins his second term.
We see five factors driving this:
- Strong recent economic data
- Inflation expectations for the future
- Expected changes in monetary policy
- Fiscal policy
- Market sentiment
Strong Economic Data
Despite misgivings over the past year, the underlying data shows a robust economy with strong fundamentals.
Unemployment remains fairly low at 4.1%, the CPI, while stubborn, is settling at just under 3%, and Americans have a brighter outlook on the economy ahead. For years the news cycles have been the boy who cried wolf over an imminent recession that never materialized. That said, the Federal Reserve still has its work cut out for itself, and investors are nervously watching. Given the strength of the job market, it’s less likely that the Fed will pursue aggressive rate cuts (in fact, a rising yield can lead to increased short-term rates), leading investors to demand higher rates for longer-term securities.
Inflation Concerns
While inflation has come down far enough for the Fed to lower rates in 2024, it is far from beaten. Though we’ve had some respite in the past few months, many economists have revised their outlook to expect higher inflation due to some of President Trump’s proposed policies (which could spur inflation again if not implemented carefully).
Expectations for higher inflation can have upward pressure on bond yields as investors seek compensation for an anticipated decrease in the purchasing power of future cash flows.
Monetary Policy Expectations
The Federal Reserve seems to be narrowly threading the needle between spurring growth, limiting inflation, and avoiding a recession.
Given how stubborn inflation has been (along with a robust job market and strong consumer spending), the Fed has indicated a slower pace of rate cuts for 2025, giving investors an expectation of higher rates for longer. This leads to investors adjusting their expectations and a rise in long-term bond yields as a result. The Federal Reserve’s actions in late 2024, including rate cuts, have not alleviated these pressures as much as expected, with markets reacting to the Fed’s cautious stance on further reductions.
Fiscal Policy and Debt Issuance
Not only is the economy in a different state for his second term, but President Trump inherits a ballooning deficit as well.
President Trump inherited a federal debt of $36.2 trillion, over $16 trillion higher than when he began his first term. Thanks to a growing deficit, the US government has a strong need for funding through debt issuance, leading to an increased supply of Treasury securities in the market. Combined with the downward pressure on demand due to the Federal Reserve’s quantitative tightening, this pushes yields up as investors require higher returns to absorb new supply.
Market Sentiment and Global Factors
While options markets are far from a guarantee of what lies ahead, they do provide a clue to how people currently view the state of the economy and what sorts of bets they are willing to make. The bet so far seems to be one based on the uncertainty of how President Trump’s policies will impact inflation and the national debt. While many of these policies are designed to stimulate the economy and create a better environment for businesses in America, they could also drive up prices (and inflation as a result) if not carried out properly.
Collectively, these factors create an environment where investors anticipate future inflation and demand higher yields as a result. While we do not have a crystal ball to spell out what will happen in 2025, you can prepare for what lies ahead.
What Can You Expect?
Throughout 2023-2024, many expected the bottom to drop off of the economy, which never quite happened. Going into 2025, it’s tempting to say what we think might lie ahead; however, as we’ve seen, the global economy is a delicate system with far too many moving parts to reliably make a prediction.
There’s something that’s not out of your control, though: an asset allocation based on your risk tolerance, goals, and cash flow needs.
And that’s exactly how we structure the financial blueprints for our clients. At M3 Family Office, we bet on the long-term growth of the economy while taking a strategic approach to wealth management, from the money you need now to the money you need in 20 years. We do this by systematically reviewing your investments through the lens of:
- Money you need now, which should be set aside in the highest-yielding money market account you can find.
- Money you need in the short term, which should be invested in a Treasury ladder to lock in short-term rates and avoid state income taxes.
- Money you need in the long term, which should be diversified in tax-advantaged index funds.
You can’t control or predict what will happen in 2025, but by taking a strategic and tax-advantaged approach, you can navigate the storms.
This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
M3 Family Office LLC (“M3 Family Office”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where M3 Family Office and its representatives are properly licensed or exempt from licensure.