Will Trump’s agenda cause an inflation resurgence?

You know how the shrinking spread between yields on government and corporate bonds is a sign of optimism about the economy? Well, how high is too high? This week, the brokerage T. Rowe Price predicted that 10-year Treasury yields could top 6%, which hasn’t happened in nearly a quarter century.

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Yields could keep rising in 2025 for a few reasons: Additional tax cuts are likely under the incoming Donald Trump administration, which could increase the budget deficit, forcing the Treasury Department to issue a whole bunch of new bonds and driving up rates in the process.

Additional tariffs are also possible, which could push up inflation and alongside it — you guessed it — interest rates. Plus, there’s the threat of mass deportations.

“Those all smell a bit inflationary to us,” said Collin Martin, a director and fixed income strategist at Charles Schwab, which is a Marketplace underwriter.

He said tax cuts can be inflationary because they stimulate consumer spending. And if a huge number of immigrants are deported, the labor force shrinks.

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“If we lose some of those workers, we need to find people to fill those voids, and chances are other potential workers might start to demand higher wages to do those jobs,” Martin said.

Again, inflationary.

When bond investors expect that prices will rise, Randy Vogel, head of fixed income at Wilmington Trust, said they start reevaluating how much interest they want to get paid on 10-year Treasuries.

“So investors are going to want to adjust that higher to compensate for higher inflation,” he said.

And remember — there’s a reason why the last thing we say in the numbers every day is the rate on 10-year Treasurys. Because as goes the yield on the 10-year T-note, so goes a bunch of other stuff.

“You know, mortgage rates being one notable example,” said Abby Urtz, head of product strategies and economics with FHN Financial.

She said another example is the yield on state and city bonds. If Treasury yields jump to 5% or even 6%? “That could absolutely translate into layoffs, suspended capital projects, certain infrastructure plans may have to get postponed,” she said.

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Corporations might have to make similar decisions, said Chuck Tomes, a director with Manulife Investment Management.

To be clear, he doesn’t expect that yields will jump that high this coming year. But he said the possibility is something the Federal Reserve is mindful of.

“They do want to continue to move forward with the rate cuts that they have been envisioning. It’s just maybe they don’t do as much as they were once planning,” he said.

That means interest rates may not be coming down much further.