Steno Signals #128 - I thought Trump and Tariffs were supposed to lead to bond riot?

The trend shift in fixed income is remarkable and sharply contrarian to the post-Trump consensus. We expect more of the same ahead, coupled with a firm decision by the Fed to support liquidity in Dece

Happy Sunday, friends, and welcome to my straight-to-the-point editorial on everything macro!

Just as everyone had concluded that Trump and his (alleged) trade wars would be bond-unfriendly, the bond market has started performing much better—exactly as we suggested would happen following the election results.

The first major difference compared to 2016, when bonds rioted after Trump's victory, is that Trump was the clear base case this time around. The second major difference is that Trump's policy mix is not inflationary this time—in fact, it’s quite the opposite.

Trump's platform is a mixture of the following: spending cuts/efficiency gains (DOGE!), loads and loads of drilling, and tariffs (or at least the threat of tariffs). None of these are inflationary, including tariffs, as the FX effects mitigate their impact. Additionally, producers and exporting countries often end up absorbing part of the cost, especially on non-necessities. And let’s not forget—Trump was given a mandate by the electorate to fix inflation after Biden, not to re-fuel it.

On top of that, the divergence between oil prices and inflation expectations in the aftermath of Trump's victory never made much sense. Somehow, markets convinced themselves of an inflationary policy mix that also included much lower energy prices. Frankly, I’ve never heard of such a combination before. Energy is everything—even AI.

Chart 1: Massive divergence between oil and bond yields closing from above?