The potential impact of Trump's return to the White House on global bond yields.

• There is a belief that Donald Trump's plan to implement tax cuts and high tariffs may stimulate economic growth, but it could also increase the budget deficit and stoke inflation.
• The likelihood of the Federal Reserve continuing its rate-cutting cycle may be affected by Trump's potential return to the White House, which could maintain an upward bias on yields.
• Morningstar's associate director of fixed income ratings, Shannon Kirwin, stated that many investors anticipate European bonds to perform relatively well in the near future, despite the forecast for the euro to weaken.

The election of Donald Trump in the US has intensified worries about rising costs, causing strategists to reassess their predictions regarding global bond returns and exchange rates.

The president-elect's plan to implement tax cuts and high tariffs may stimulate economic growth, but it could also increase the budget deficit and exacerbate inflation.

The likelihood of Trump's return to the White House may disrupt the Federal Reserve's rate-cutting cycle, leading to an upward bias on Treasury yields. Bond yields increase when investors anticipate higher prices or a larger budget deficit.

According to Alim Remtulla, chief foreign exchange strategist at EFG International, it would be "untenable" for the Fed to continue with its easing plans while yields rise.

If the Fed pauses rate cuts, the economy will no longer be at risk of recession, or if the economy turns and yields implode, a recession will loom, according to Remtulla's email to CNBC.

Trump's election presents two possibilities: a trade war and increased fiscal spending, which work against each other.

Since Trump's election victory in early November, the benchmark U.S. 10-year Treasury yield has risen sharply, but has since moderated.

On Wednesday morning, the 10-year Treasury yield increased by more than 3 basis points to 4.4158%.

European bond market offers 'more compelling value'

Remtulla of EFG International stated that in Europe, there has been a slight improvement in not-as-bad-as-expected data, as well as the recognition that Trump policies will take some time to be implemented.

It's possible that the rhetoric from the Trump campaign was for election purposes and that he'll govern closer to the status quo. This would aid the euro zone in avoiding recession and lifting [the economy].

On Wednesday, Germany's 10-year bond yield, which serves as the benchmark for the euro zone, was 2.337%. However, the yield on 2-year bunds increased by approximately 1 basis point to 2.151%.

Morningstar's associate director of fixed income ratings, Shannon Kirwin, stated that many investors anticipate European bonds to perform relatively well in the near future, despite the forecast for the euro to weaken.

Kirwin stated in an email to CNBC that prior to the U.S. election, the majority of bond fund managers he had spoken with believed that the European bond market provided greater value than the U.S. market.

She stated that many managers had already adjusted their portfolios to have a slight tilt towards European credit and a decrease in US corporate bonds.

To boost U.S. earnings, Trump has proposed imposing a 20% tariff on all imported goods, with a maximum of 60% for Chinese products and up to 2,000% on Mexican-built vehicles.

Trump has stated that the European Union will face consequences for not purchasing enough American goods.

Managers in both markets are opting to keep a bit of powder dry, such as increasing quality or holding onto more cash, in order to capitalize on potential volatility in the future, according to Kirwin.

What about Asia?

Deutsche Bank's global head of emerging markets research, Sameer Goel, stated on CNBC's "Street Signs Asia" on Tuesday that the potential for higher U.S. inflation under a second Trump presidency has not yet been fully reflected in market prices.

What is the predicted impact of Trump 2.0 on Asian economies and regional currencies, according to Goel? He believes it will result in wider inflation gaps between the U.S. and Asia, which could subsequently cause further currency weakness.

As Goel stated, individual central banks and countries may have different approaches, but there are more crosscurrents than offsetting due to the potential negative impact of tariffs on growth.

Alternatively, he stated that energy prices could lead to inflation, and currency weakness could exacerbate the impact for some countries more than others.

MUFG analysts stated that investors have not yet fully factored in the potential magnitude of U.S. tariffs on China and other countries when it comes to Asian currencies.

Analysts at MUFG stated in a research note published on Nov. 7 that a 60% tariff on Chinese products would necessitate a 10% to 12% depreciation of the Chinese yuan against the U.S. dollar. They cautioned that the potential for tariff retaliation could exacerbate the situation and there is also a risk of other countries imposing tariffs on Chinese products.

Analysts at MUFG believed that Asian currencies with greater exposure to China were more likely to be affected by Trump tariffs, specifically mentioning the Singapore dollar, Malaysian ringgit, and South Korean won.

Currency outlook

Financial markets often engage in "second-guessing" when trying to predict outcomes, according to strategists at Dutch bank ING, as stated in a research note published this month.

ING strategists advised against overthinking and instead believed that the new administration's plans for looser fiscal and tighter immigration policy, combined with relatively higher US rates and protectionism, made a strong case for a dollar rally, as stated in a note published on November 13.

"While the US economy may experience overheating, it is predicted that 2025 will be the year when more air is injected into any potential dollar bubble," they stated.

European currencies, meanwhile, are expected to underperform.

ING strategists predict that a peak in risk premium will occur in late next year, even if the euro remains above parity with the U.S. dollar before then, they expect a structural shift from a 1.05-1.10 range to a 1.00-1.05 range.

ING predicted that Scandinavian currencies, including Sweden's krona and Norway's kroner, were at risk of depreciation, while the British pound sterling and Swiss franc were expected to perform slightly better than the euro.