Stock prices skyrocketed following Donald Trump’s victory in the presidential election on Wednesday.

While the stock market soared, the bond market experienced a downturn.

On Wednesday, stock values hit new heights after the news of Trump’s election, indicating a possible end to the uncertainty surrounding the election season and reflecting some economists’ optimism regarding his economic policies.

Simultaneously, the yield on 10-year Treasury bonds increased to 4.479%, marking a four-month peak. Rising bond yields typically correlate with falling bond prices.

While stock traders celebrated, bond investors expressed concern over Trump’s economic strategies.

During his campaign, Trump emphasized a commitment to maintaining low taxes and introduced substantial tariffs on imported goods.

Economists foresee increasing deficits during Trump’s presidency

Experts caution that Trump’s intentions to sustain and expand tax cuts could exacerbate the federal budget deficit, currently at $1.8 trillion. Increased tariffs might also spark inflation, which the Federal Reserve struggles to manage.

For bond investors, these concerns indicate a rise in yields. Yield represents the interest rate, or the expected return for those lending money, in this case to the government.

According to Jonathan Lee, senior portfolio manager at U.S. Bank, “Bond investors may feel increased risks associated with holding U.S. debt in the absence of a clear spending reduction strategy—which is currently lacking.”

The yield on 10-year Treasury bonds serves as a key reference in the bond market. According to The New York Times, yields started climbing weeks prior as investors braced for a Trump victory, with a significant jump of up to 0.2 percentage points occurring on Wednesday.

This rise in yields was unexpected, as they usually trend alongside interest rates.

In contrast, the Federal Reserve announced a rate cut on Thursday, lowering the federal funds rate by a quarter point, a widely anticipated decision that primarily impacts the short-term bond market.

Long-term bond yields are increasing because “many investors anticipate that under Trump, the federal government will continue high deficit spending,” states Bankrate, a personal finance resource.

Analysts expect more tax cuts with Trump

Many analysts predict that Trump, alongside a Republican Congress, will look to reinstate the 2017 Tax Cuts and Jobs Act, which previously lowered tax rates and increased the federal deficit during Trump’s first term.

According to Bankrate, “Major spending during the Biden administration, particularly for COVID relief, further added to that debt.” Now, bond investors are anticipating a renewed increase in the deficit under Trump.

In a broader context, bond investors are anxious that “the U.S. has been living beyond its means for a prolonged period,” stated Todd Jablonski, global head of multi-asset investing at Principal Asset Management.

Jablonski further expressed that there are growing concerns regarding “the long-term creditworthiness of the United States, which may not be perceived as notably strong as before.”

As the federal deficit increases, investors face greater risks and therefore expect higher interest rates for lending money to the government.

Neither Trump nor Democratic candidate Kamala Harris proposed a credible method for tackling the deficit during the campaign, according to economists. Harris suggested increasing taxes on the wealthiest Americans and corporations for additional revenue.

In contrast, Trump intends to deepen his existing tax cuts, arguing that economic growth and job creation will generate more revenue.

However, the bond market may remain skeptical.

“If the Republicans gain control of the House, Senate, and presidency, I anticipate volatility in the bond market,” remarked Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania.

In an interview with CNBC on Election Day, a source expressed concern over the potential reimplementation of tax cuts by Trump, suggesting that this could lead to a rise in bond yields.