Investors spent most of October pricing in Donald Trump’s second coming. We saw an initial surge in yields on the day of the result, but since then, an undue sense of calm has fallen. However, experience suggests the storm isn’t too far away!

In response to Trump’s victory, French President Macron delivered the following words:

What’s clear for now: the carnivores are back!

With a second Trump term ahead, we ask: who’s going to be chewing on ribeye and who will be nibbling at the broccoli – and what are the implications for financial markets?

The ‘carnivore in chief’

With Trump as head chef and his America First approach firmly in hand, US economic policy looks set to serve red meat for all three courses.

Whether it be tax cuts, tariffs, immigration or geopolitics, Trump will not be ordering greens anytime soon.

Whisper it: all that meat doesn’t form a balanced diet.

For one thing, these full-blooded, growth-targeting economic strategies risk an uptick in inflation. The US economy is already performing well, yet inflation is not convincingly beaten. The danger of over-seasoning is high. A combination of Trump’s policies could see inflation quickly move back into uncomfortable territory.

The US Federal Reserve (Fed) went large in September with a 50-basis point cut. Now, improved US data alongside Trump’s fiscal policy mean we expect limited cuts in 2025.

The second issue with all this red meat is how to pay for it. The finest American steak is a whole lot more expensive than a parsnip. We appreciate that Elon Musk and Vivek Ramaswamy are tasked with cutting costs, but extending or increasing tax cuts and radical ideas for halting immigration won’t come cheap.

This means even more US debt issuance. Will financial markets revolt at this level of borrowing with a Liz Truss-like episode? We don’t think so. That said, the US will naturally face slightly higher borrowing costs.

What does this mean for US Treasury yields?

We think the Fed will struggle to meaningfully lower interest rates from here. This means yields will remain elevated for some time to come.

Longer maturity bonds can sell-off even more, though. Curves will steepen as markets build higher levels of term premium (the additional return investors demand for holding longer-term bonds) into yields. Higher uncertainty around monetary policy, inflation and issuance means investors will demand extra yield compensation for longer-term issuance. As a result, long-dated maturity yields will rise quicker than the front end of the curve.

The ‘European herbivores’

Europe cannot be the world’s herbivore anymore: it needs to become an omnivore.

Macron is right. Naturally, the biggest and most immediate impact of Trump’s policies will be felt in the US. However, we have a sneaking suspicion that Europe’s reaction might be more significant.

Europe quite rightly prides itself on its cuisine. It’s home to 86 of the world’s 146 three-star Michelin restaurants; the US has a lowly 10. From an economic perspective, the roles are reversed. The US is delivering the gastronomic masterclass, while Europe, like the UK, is serving a bland, unappetising meal.

Trump could be the spark Europe needs to get its gastronomic tastebuds firing again, to don its chef whites and consign its rather outdated, boring economic model to the bin.

First on the menu: defence spending must be increased, and quickly. The US is likely to severely reduce its spending, and even former Chancellor Angela Merkel has admitted that Germany undershot in this regard.

Second: the full tasting experience. Mario Draghi (remember him?!) recently produced a smorgasbord of ideas to fire Europe into life. The continent needs a host of reforms: improving innovation, regaining productivity and reducing international dependence. The key ingredient is investment – and a lot of it. Draghi proposed an extra 800 billion euros annually.

This would require even more debt issuance in Europe. The precise recipe requires some nuance. Germany has been too busy eating gruel – the country has a debt-to-GDP ratio of ‘just’ 63%, yet growth is still in cold storage. With elections on the horizon, borrowing-to-spend rules may be relaxed.

Other countries, especially France and Italy, must be vigilant to avoid overloading already high spending. In recent years, too much welfare spending with too little growth and tax revenues led to lopsided budgets. A more balanced diet is called for.

We expect a fairly spicy outcome in European fixed income. More issuance will likely keep long-end yields pinned, but the European Central Bank (ECB) should be busy at the pass. With northern European economies especially weak and fiscal support not forthcoming, the ECB will need to cut rates further and faster than the US next year.

That’s why our portfolios preferred to hold European debt over US debt for the second half of 2024. We expect further curve steepening to come.

The UK’s ‘mystery menu’

How would we characterise the UK economy over the last few years? It’s not too controversial to say it has been a lot like a Christmas office party’s buffet: beige and unappetising. Sure, it has done its job (just), but it has lacked flavour.

In response, Chancellor Reeves’s first budget added some relatively bold flavours to the mix. These included increases in borrowing, spending and taxation, with a strong commitment to fiscal prudence. With all these ingredients, however, we (and the market) are not entirely sure how the final dish will taste.

The initial reaction was negative – lots of investment, lots more gilt issuance, potentially more inflation, and not a lot of forecasted growth.

The budget was meant to be a (new) recipe for the next 5-10 years, but markets are notoriously short-term. While we wait, gilt investors will focus on the amuse-bouche of how National Insurance changes feed through to the wider economy. If the private sector passes these costs on, it will be inflationary. If not, higher charges will likely lead to lower wages and job losses.

We’re leaning towards the latter, which would mean the Bank of England needs to accelerate interest rate cuts in 2025.

What about the other ‘carnivores’?

China’s Xi Jinping will be ready to react to Trump’s America First policy. Vladimir Putin will see an opportunity in Ukraine, as will Benjamin Netanyahu in the Middle East. The big meat-eaters are prowling. Like in 2016, financial markets need to be on their toes for whatever comes their way.

How does this play out in government bond markets?

We think US yields will remain elevated for the time being, but we see opportunities east of the Atlantic. Continued US-Europe (including the UK) divergence and positioning for steeper curves should work well into 2025. With the January supply window just around the corner, we’re licking our lips.