Trump, interest rates and bonds
The prank that could end in tragedy
Karl Marx, in his work The 18th Brumaire of Louis Bonaparte, wrote:
"Hegel observes somewhere that all the great world-historical events and figures appear, so to speak, twice. He forgot to add: the first time as tragedy, the second as farce."
This phrase expresses the idea that historical events often repeat themselves, but when they do, they lose their original gravity or significance. The tragedy of the original moment, with all its weight and seriousness, can turn into a parody or farce when history repeats itself.
Another historical figure who is likely to resurface as a hoax is Trump. Upon taking office in 2016, Trump claimed that he would reduce the US trade deficit with China by imposing tariffs. However, after the tariffs were imposed in 2017 and 2018, the deficit increased from $375 billion to $418 billion respectively, only to fall to 2016 levels by the end of his four-year term.
The decline was driven by lower demand in the United States during the COVID-19 pandemic, not a fundamental shift in trade dynamics. After his inauguration, re-elected Trump said via video call in Davos:
"With oil prices falling, I will demand an immediate reduction in interest rates."
Looking at the technical picture of the US 10-year Treasury note, it seems that the same farce is repeating itself. The chart below shows the monthly prices since 1982 of futures contracts, with the underlying value being the 10-year US Treasury note.
The central Least Squares Line (LSR) is the line of best fit, which minimizes the sum of the squares of the differences between the observed and predicted values based on the line.
It represents the average trend of the data, while parallel lines are drawn with 2 standard deviations on either side, where the deviation expresses the measure of dispersion of the values around the mean.
As clearly shown in the chart, the four-decade bond bull market appears to be over, while new downward momentum will be provided by the breakdown of $105, leading to lower lows (DOW Theory).
Such a development will have consequences for government bond yields due to the inverse relationship between bond prices and yields.
When government bond prices fall, yields rise, as investors demand a higher return to compensate for the lower purchase price.
So what is the long-term technical picture of returns?
The Ichimoku Cloud is a powerful technical analysis tool, thewhich is used to identify trends, support/resistance levels,as well as for identifying potential input and output signals.
We observe on the monthly chart that the "cloud" acts as support rather than resistance, possibly foreshadowing that "bond vigilante" investors will demand higher yields on bonds, perceiving fiscal or economic risks.
One of the risks is prolonged inflation, as BlackRock chairman Larry Fink pointed out at the Davos Economic Forum.
In the mid-1970s, central bankers again believed they had tame inflation, as now, only to be refuted by the new rally in prices at the end of the decade.
If bond markets sense risk, they raise the cost of borrowing for governments, imposing restrictive fiscal and monetary policies.
A characteristic expression of their enormous influence was the iconic phrase of James Carville, strategic advisor to Bill Clinton, in the 1990s:
"I used to think that if there was reincarnation, I would want to come back as president, or pope, or a .400 baseball player. But now I want to come back "Like the bond market. You can intimidate everyone."
Technical analyst David Linton of Updata Analytics predicts, based on Point & Figure Analysis, even a double-digit percentage for the yield of the ten-year bond at the end of Trump's term, with the first stop being 6.45%.
Therefore, the second round of tariffs à la Trump with mandates for low interest rates may seem like a parody or farce, but for the social majority they may reappear as a tragedy on Elon Musk's artificial intelligence stage.
Certified Technical Analyst (MSTA) and financial/sports writer with expertise in capital markets, trading systems and trading strategies.
Graduate of the Department of Statistics of the London School of Economics and Finance of ALBA Business School.
