How Will Trump’s Second Term Impact Asian Bonds?
Donald Trump 2.0 could see lower taxes and increased tariffs. What this could mean for Asian markets will be clearer as we move into 2025.
The US Federal Reserve (Fed) has said it does not believe that Donald Trump’s victory will immediately impact monetary policy. 1 Over the longer term, though, any import tariffs and reduced taxation may reignite inflation, meaning US interest rates could stay higher for longer. In the wake of the election result, bond investors adopted a longer-term view, similar to the Fed, which led to a rise in US government bond yields.2 In the meantime, the US central bank should continue to trim interest rates at a measured pace as inflation cools, a move followed by other central banks.
The Federal Deficit, Tariffs and Tax Cuts
Bond investors remain concerned about the US budget deficit and the inflationary impact of tariffs. The 10-year breakeven rate, which reflects the market’s expectations for inflation, has increased since September 2024 as a Trump victory became more likely.3
When campaigning, the republican candidate was less forthcoming about policies that would reduce the deficit. Donald Trump did propose tax cuts that may boost the economy and stoke inflation, but they would not help reduce the federal government’s deficit. With interest rates higher for longer, this reduces the relative attractiveness of bonds to investors. However, at a certain point, these elevated yields may be enough to attract participants back to the fixed-income market.4
Resurgent US Dollar Pressures Asian Currencies
Closer to home, the election result saw most Asian currencies weaken against the US dollar. This likely reflected a belief that interest rates in the US may remain relatively elevated under the new presidency. In the event of US trade tariffs, there is also the possibility that certain Asian economies may decide to devalue their currencies to prevent their exports from becoming uncompetitive.5
Tariffs are Potentially Inflationary for the US
During the presidential campaign, Donald Trump promised to implement tariffs of 60% on imports to the US from China as well as a range of other tolls on goods from other markets.6 These levies could increase the price of goods in the US and lift inflation. The effect could be dampened if replacement products are obtained from another source. In this scenario, the Fed would need to reduce the pace of interest-rate cuts to slow inflation. Furthermore, tariffs are not a one-way street, and other markets could introduce retaliatory measures that could lead to a damaging trade war.7
Who Could Benefit from Trump’s Victory?
Introducing tariffs on China’s exports to the US could see other economies become more competitive and take market share away from China. In a scenario where China imposes levies on US food export commodities, like soybeans, this could benefit other food producers because the lack of tariffs would improve their price competitiveness. This would likely boost South American food producers more than most of those in Asia.8
Negotiation Rather Than Retaliation
More positively, the domestic strength of many Asian markets may lessen the impact of any trade dispute on the region. Furthermore, there has been some discussion about China and the US agreeing to a so-called ‘grand bargain’ where mutually beneficial free trade in certain products will be encouraged.9 The US has long been a proponent of the unfettered movement of goods rather than protectionism, so this policy shift would help soothe investors’ concerns.10
A Strong US Dollar And ‘Higher-For-Longer’ Interest Rates
In the period immediately following the US Presidential election, Asian bonds generally weakened in tandem with their US counterparts; however, overall yields rose less than in the US. A strong dollar and higher interest rates are headwinds for Asian bonds. Still, the diverse nature of the region and the specific challenges in different economies mean that cross-market performance, in terms of currency and bond yields, will likely vary. Despite the changes in Asian bond prices following Trump’s victory, the fundamental drivers supporting the region's economic growth remain largely unaltered.