UBS analysts believe that while the first Trump presidency was marked by policies benefiting equities, the current economic landscape suggests a shift toward supporting Treasuries.
According to UBS, the "Trump put" is now more relevant for Treasuries than equities.
The report outlines how inflation and interest rate dynamics differ significantly from 2016.
"Reflation that entailed higher growth and inflation was welcome in 2016, but not today," UBS stated.
With headline and core CPI at 2.6% and 3.3%, respectively, and the 10-year Treasury yield at 4.28%, the bank says inflationary growth poses challenges that weren't as pronounced eight years ago.
The focus now is on "disinflationary growth," a scenario Trump inherits due to the current economic environment. However, UBS notes that higher tariffs and tax cuts under Trump's administration could accelerate inflation, a significant concern for both investors and policymakers.
As UBS analysts put it, "High inflation and interest rates are implicit constraints on the Trump policy agenda."
The equity market's recent sensitivity to Treasury yields is said to illustrate this challenge. UBS notes that since last fall, equities have faltered whenever the 10-year yield exceeded 4.6%, and a rise past 5% could force the administration to act.
"We can be fairly confident there's a Trump put for Treasuries," UBS stated, suggesting that the administration would likely curtail inflationary policies if rates climbed too high.
Ultimately, UBS predicts a policy bias toward disinflation to mitigate economic and political costs of rising inflation.
However, they explain that higher rates may first be necessary to stabilize the outlook, leading to elevated market volatility in the coming months.
Investors, UBS says, should brace for a turbulent price discovery process as Trump's administration navigates these challenges.