The initial response to the President-elect’s victory was a huge Wall Street rally. Despite the fact that there were already significant gains in 2024, stock market indices reached new heights immediately after the election. The bond market? Not so much of a rally, despite the fact that the Federal Reserve lowered their benchmark lending rate at a scheduled meeting which took place right after the election. The question is – why was there such a strong response in equities, but not so much in bonds?

There certainly was the opportunity for a bond market rally as interest rates had risen significantly during October after reaching their low point in September. The answer might be related to concern regarding the budget deficit. Remember that we just finished the election season. No candidate gets elected without promising the public goodies in the form of lower taxes, tax credits and spending in certain areas. There was little discourse from either side as to address the burgeoning federal deficit.

The more money that the federal government borrows to fund the deficit, the more pressure there is on interest rates. Just like housing prices, if there is more demand for money, the price of that money goes up—or in this case, the bond market falls. Thus, there is a concern that more government spending or lower revenue will put pressure on rates. In reality, Congress must agree to these changes and there are enough deficit hawks in Congress to at least ask the question – how are we going to pay for all this? We are not saying that the promised agenda will not be implemented, but there will be compromises struck. Thus, the budget deficit is real and needs to be part of the conversation which will start next year. For now, we will just close with – Happy Thanksgiving and look for an announcement on new loan limits for 2025 this week or next.