By Davide Barbuscia
NEW YORK (Reuters) - Giant U.S. asset managers overseeing well over $20 trillion are anticipating continued price pressures because of President Donald Trump's immigration and trade policies, a scenario that will likely keep threatening the bond market this year.
Vanguard, the world's second-largest asset manager, which manages over $10 trillion, said in a first-quarter fixed income outlook report seen by Reuters that it expects "progress on inflation to stall," with core measures of price pressures stuck above the Federal Reserve's 2% target and above 2.5% for most of 2025.
Trade and immigration policies implemented by Trump's Republican administration could complicate the picture further, it said in a report written by its active fixed income team, led by Sara Devereux, the global head of fixed income group.
"While our base-case outlook is positive, we emphasize that the uncertainty created by the incoming administration creates a broader range of potential outcomes for growth, inflation, and monetary policy, both domestically and abroad," it said.
Investors are waiting for more announcements from the new administration about policies on tariffs, immigration and tax cuts. Trump, who began a second term in the White House on Monday, vowed this week to hit the European Union with tariffs and said his administration was discussing a 10% punitive duty on Chinese imports - lower than the 60% he promised during his 2024 presidential campaign.
He also said he was thinking of imposing 25% tariffs on imports from Canada and Mexico on Feb. 1.
The impact of Trump's policies on inflation and growth will depend on their scope and sequencing, said Libby Cantrill, PIMCO's head of public policy, and Allison Boxer, an economist at the bond-focused investment firm, which manages $2 trillion in assets.
But in a scenario where tariffs increase and budget deficits widen due to expected tax cuts, growth could decelerate this year while inflation rises. "In our baseline outlook, we expect modestly higher core inflation of around 20 to 40 basis points in the U.S. in 2025," they wrote in a note on Thursday. "The negative growth effects would likely be of a similar size."
Vanguard also warned about the possibly negative-growth impact of tariffs, depending on their size and distribution. "Geopolitical retaliation could increase business uncertainty and further constrain growth," it added.
RISING YIELDS
U.S. government bond yields, which rise when prices decline, have surged over the past few months, partly in anticipation of pro-growth policies under a Trump administration which could also reignite price pressures, complicating the Fed's efforts to bring inflation down to its target.