It has been an eventful beginning to Donald Trump’s second Presidency. He ran on a platform promising improved border security, expansive tariffs, re-shoring to bolster manufacturing in the US, and a clear focus on reduction of government spending and fiscal responsibility (DOGE). So far, he is trying to make good on all his promises.

With the transition from the Biden administration to President Trump’s leadership, 2025 has already seen significant economic and geopolitical realignments. The U.S. dollar has gained strength as markets react to the administration’s protectionist stance, including proposed tariffs of 25% on Canadian and Mexican imports and 10% on Chinese goods. While much remains uncertain as these policies undergo scrutiny, one thing is evident: Trump’s presidency is already reshaping global expectations.

The 10-Year Treasury yield has diverged from historical patterns during the Federal Reserve’s current rate-cutting cycle. Notably, this marks the first instance in 30 years (1994) where the 10-Year yield has increased immediately following rate cuts.

The FOMC continues to watch the economic data come in and so do we. There are factors that could make yields fall: higher unemployment, an increase in defaults, or an economic slowdown. There are also factors that could make yields rise: persistent inflation from re-shoring or higher tariffs, liquidity problems, or deficit funding issues. The consumer makes up about 70% of GDP and seems to be increasingly leveraged. Our federal government deficit also continues to grow…

While the 19 members of the FOMC are split on how many cuts we will see this year, we are firmly in the ‘2 or less camp’ while the economy remains strong. With a potential higher neutral rate and inverted yield curve, we believe an intermediate barbell strategy is best for Municipal Bond investors right now. With potential economic uncertainty ahead, we continue to believe municipalities are an attractive asset class providing stable cash flows and favorable tax treatment.

Throughout all of this, the unemployment rate fell from 4% to 3.7%. The economy has remained strong and the consumer has remained resilient, allowing the Fed to have a single mandate in combatting inflation. While debates rage on about how many cuts we will see in 2024, we continue to monitor the unemployment rate carefully as this will be one of the strongest influencers of how 2024 continues.

The massive amount of stimulus coupled with the break-neck pace of tightening leads to many questions about the strength of the economy and the consumer. While we are now in a waiting period with long and variable lags, we believe we are at or near peak rates.

The overall economy stabilized after the collapses and buy-outs of multiple banks including SVB and First Republic. While yields have risen, the pace of rate increases has slowed. Hopeful that they are winning the battle against inflation, we may be entering a new season of higher yields with a data-dependent Federal Reserve.