Harley Bassman on Trump, the Fed, and the Bond Market

Episode Summary

Executive Summary: The episode examines the post-election bond-market reaction after Trump’s victory and ahead of a Fed meeting, focusing on why rates volatility remains elevated even as equity volatility falls. Harley Bassman argues the core uncertainty is not stocks but the path of Fed policy, inflation, term premium, and Trump-era fiscal, tariff, and immigration policies, all of which could keep bond markets choppy while stocks remain comparatively calm.

Main Topics: Post-election market reaction (Priority: 5/5): The hosts note that Trump’s win removed election uncertainty, lifted equities, and pushed bond yields higher, signaling a bond-market-driven repricing rather than a broad risk-off move. MOVE vs. VIX disconnect (Priority: 5/5): Bassman explains that rates volatility spiked around the election and remains elevated, while equity volatility has collapsed, creating an unusual divergence between the bond and stock markets. Fed policy and Powell’s incentives (Priority: 4/5): Discussion centers on the upcoming Fed cut, the path of future easing, and the idea that Powell may prioritize inflation credibility and legacy over aggressive rate cuts. Term premium and fair value in bonds (Priority: 4/5): Bassman argues that long-term yields are near fair value given expected inflation and policy rates, but the term premium may rise if the front end of rates falls while uncertainty persists. Trump policy uncertainty (Priority: 5/5): The transcript emphasizes that markets do not yet know the real-world effects of tariffs, deportations, and fiscal expansion, making the policy outlook a major source of bond-market volatility. Political and market constraints on the administration (Priority: 3/5): The hosts discuss how higher mortgage rates, deficits, and stock-market reactions could constrain Trump’s policy ambitions, especially if personnel choices are more extreme than in the prior term.

Key Arguments: The bond market is reacting more than the stock market because uncertainty is concentrated in rates, not equities. The MOVE index spiked when the election entered its one-month volatility window and is now easing, but remains elevated due to Fed uncertainty. The VIX has fallen sharply because the election result is no longer ambiguous and equities have a generally favorable policy backdrop. Powell is likely to move cautiously because he does not want to be remembered as another Arthur Burns who prematurely loosened policy. Long-term yields look near fair value if inflation settles around 2.5% and the Fed funds path remains near the dot plot. The term premium should expand if front-end rates decline while market uncertainty about fiscal policy and inflation persists. Trump’s actual policy implementation matters more than campaign rhetoric; tariffs, immigration, and spending could push rates and inflation in different directions. Personnel choices for Treasury and senior economic posts may matter more to markets than Trump’s own statements because seasoned appointees reduce uncertainty. Higher rates can quickly feed into deficits because much of U.S. debt rolls over in the front end, creating a real political constraint. Higher stock prices and mortgage-rate sensitivity may serve as market-based checks on aggressive policy changes, including tariffs.

Data Points: Recording time: November 6, 10:33 a.m. - The hosts note they are recording the morning after the election result is clear. MOVE index before drop: About 130 - Bassman says the bond-volatility index had been around this level before easing after the election. MOVE index current level: About 117 - Bassman says the MOVE index has declined but remains elevated ahead of the Fed meeting. 10-year yield move: About 18 basis points - Bassman says the market priced the election-related move accurately and 10-year rates moved about this amount. MOVE-implied election move: 18 basis points - Bassman says the market expected roughly this amount of volatility when the election entered the window. VIX recent level: Around 15 - Joe notes equity volatility has fallen to near lows. VIX election-day peak: Around 20 - Joe says the VIX only briefly rose to around this level, still close to historical norms. Market vs. Fed dots: 40 basis points higher - Bassman says the market is now pricing rates about 40 bps above the Fed’s most recent dot plot. Fed funds vs. 10-year historical spread: 147 basis points average - Bassman cites a 35-year historical average spread between Fed funds and the 10-year yield. Fed funds long-term dots: 288 bps - Bassman references the Fed’s long-term policy projection. Inflation assumption: 2.5% - Bassman uses this as a fair-value assumption for inflation. PCE inflation: 2.7% - Bassman cites current/expected PCE inflation in his fair-value framework. Fair-value 10-year yield: 4.35% - Bassman’s calculation for where 10-year yields should be under his assumptions. Current 10-year yield: 4.45% - Bassman says yields are already near this level. Trump spending estimate: $7 trillion more - Bassman references campaign claims about large fiscal expansion. Immigration/deportation discussion: 1 million to 10 million people - Bassman uses these figures as hypothetical policy outcomes affecting labor supply and GDP. Tariff estimate: 20% to 30% - Bassman mentions possible tariff levels as a source of inflationary pressure. U.S. stock ownership: 61% of American households - Joe cites Gallup to explain why stock-market performance matters politically.

Pivotal Quotes: "Markets hate uncertainty." — Harley Bassman: He explains why the slate of Trump’s personnel picks matters so much for rates and volatility. "Jay Powell does not want to go down as Arthur Burns" — Harley Bassman: Bassman argues Powell will be cautious about cutting too aggressively if inflation risks reappear. "You take Trump seriously, but not literally." — Harley Bassman: He uses this to frame how investors should interpret campaign promises versus actual policy implementation.

Implications: Expect bond markets to stay volatile until Fed direction and Trump’s cabinet choices become clearer. Equities may remain relatively stable, but rates, mortgages, deficits, and inflation expectations are likely to drive the next major repricing.