Rising U.S. Treasury yields and a strengthening in the value of the dollar in the wake of Donald Trump's return to the White House are threatening to counteract the Federal Reserve's efforts to lower interest rates.

The Federal Reserve is expected to cut its benchmark interest rate by 25 basis points on Thursday, marking a back-to-back reduction and bringing the policy rate to a range of 4.5%-4.75%, the lowest since February 2023.

The bond market appears less influenced by the Fed's dovish stance and more by the fiscal and inflationary implications of Trump's victory in the 2024 presidential election.

Trump's Fiscal Plans Drive Deficit Concerns

Trump's proposed fiscal policies are expected to add significantly to the U.S. national debt.

According to the nonprofit Committee for a Responsible Federal Budget (CRFB), Trump’s tax and spending plans could increase the federal deficit by approximately $7.75 trillion between 2026 and 2035 in a baseline scenario.

This would push the debt-to-GDP ratio from 102% to a staggering 143%, or 18% higher than current law projections.

In a high-deficit scenario, the CRFB estimates that deficits could swell by $15.55 trillion, elevating the debt-to-GDP ratio to 157%.

Such a sharp rise in the national debt would necessitate a sharp increase in Treasury issuance by the government in the upcoming years, putting upward pressure on yields as investors demand higher returns to offset heightened risks of fiscal instability.

On top of that, Trump's pledge to raise import tariffs — by 60% on goods from China and 10% on imports from other countries — is widely viewed by economists as an inflationary move.

Treasury yields have surged sharply in under two months, with the 10-year yield climbing from 3.6% to 4.35%. As a result, the U.S. 10 Year Treasury Note ETF (NYSE:UTEN) has fallen by over 5% since its September highs.

Chart: 10-Year Treasury Yields Spike, Anticipate Worsening Debt Path After 2024 Elections

Rising Yields Complicate Fed's Easing Path

In the meantime, the Fed cut interest rates by 50 basis points in September and guided investors toward a further cut in November, a stance that would typically lower borrowing costs and ease financial conditions.

The bond market's reaction has been the opposite, creating tighter financial conditions that investors wouldn't normally expect under a Fed easing bias.

In addition to rising yields, the U.S. dollar has also strengthened significantly.

“Bond yields are rising for a good reason, as the economy is holding up stronger than expected and markets are also pricing in continued government spending and the potential for widening deficits,” said Glen Smith, chief investment officer at GDS Wealth Management.