Brace yourselves—Donald Trump is back on the scene, and the markets are bracing for impact. If history is any guide, a second Trump presidency could ignite a perfect storm for bonds. Inflationary policies, debt-fuelled spending sprees, and geopolitical curveballs are all in the cards. If you’re clinging to a “safe” bond portfolio, it’s time to wake up and smell the burning yields.
Trump doesn’t do things by halves. His fiscal policy? Think massive tax cuts, heavy government spending, and a relentless focus on boosting economic growth. But there’s no such thing as a free lunch. These measures, while popular in the short term, have a nasty habit of stoking inflation.
And here’s the twist: the US is drowning in debt. Inflating it away is a tempting tool in the economic playbook—it devalues debt in real terms, making it easier to manage. But for bond investors, that’s a nightmare scenario. Inflation erodes the fixed returns that bonds promise, turning what once seemed like a safe haven into a liability.
As inflation rises, bond yields typically follow suit. Sounds fine—higher yields mean better returns, right? Not so fast. When yields rise, bond prices fall, and those holding long-term bonds are left nursing some serious losses.
If you’re sitting on a pile of long-duration bonds, you might want to rethink your strategy. These bonds are hypersensitive to interest rate movements, and in an inflationary environment, they’re the first to take a hit. Their value nosedives as investors demand higher yields to compensate for rising inflation risks.
The fix? Start looking at shorter-duration bonds. These instruments are far less volatile and won’t suffer as much in a rising-rate scenario. But don’t stop there—diversification is your lifeboat in these choppy waters. Inflation-linked bonds are a solid hedge against rising prices. They’re tied to inflation rates, ensuring your purchasing power stays intact.
Feeling bold? Venture into emerging-market debt or high-yield corporate bonds. Yes, they come with higher risks, but the potential rewards can offset some of the pain inflicted by rising inflation.
The Fed vs Trump
Trump’s relationship with the Federal Reserve has always been, let’s say, complicated. His first term saw him hammering the Fed for rate cuts and easy money policies.
Now, imagine Trump 2.0. If inflation surges under his debt-driven spending, the Fed might have no choice but to jack up interest rates, whether he likes it or not.
Higher interest rates mean trouble for bonds. Yields climb, prices plummet, and investors caught off guard face losses. The drama doesn’t end there. Geopolitical moves—think trade wars, tariff battles, or reduced foreign demand for US Treasuries—could further rock the bond market. Foreign investors have historically propped up demand for US debt; a second Trump presidency might change that dynamic, driving yields even higher.
Not all is lost. Rising yields can be a silver lining for income-focused investors willing to adapt. Higher yields mean better payouts—if you can stomach the short-term volatility. The key is to stay active. Passive strategies won’t cut it when the landscape is shifting. Rotate into sectors, asset classes, or geographic regions with better inflation protection.
And let’s not forget the role of bonds in a broader portfolio. Even under pressure, they remain a critical stabilizer when equity markets go wild. The trick is getting the balance right—don’t overexpose yourself to any one type of bond. Think of your portfolio as a symphony: bonds provide the steady rhythm, but you need the right tempo for the times.
Trump 2.0 could shake your bond portfolio in ways you’re not ready for—unless you act now. Inflation? Likely. Higher yields? Almost certain. Long-duration bonds? A risky gamble. This is your moment to rethink your strategy, embrace diversification, and stay ahead of the curve.
In a world where inflation is back in the driver’s seat, ignoring your bond exposure is not an option. Reassess, reallocate, and retool your portfolio for what’s to come—or risk getting caught flat-footed. Bonds may not be the sexiest investment, but neglecting them in this climate could cost you dearly.
Nigel Green is deVere CEO and Founder
Also published on Medium.
