Treasury yields, which rise when bond prices fall, began rising on June 28, a day after a debate between President Biden and former President Donald Trump that Wall Street saw as a major blow to Biden’s re-election chances.
Biden’s weak showing could also help tip Republicans into control of Congress, creating more room for their budget priorities.
According to the Wall Street Journal, the basic rule on Wall Street is that budget deficits tend to be larger when one party controls the government.
Many investors believe that high deficits have actually played a role in pushing Treasury yields higher in recent years by increasing the supply of bonds that the market has to absorb and putting upward pressure on inflation — prompting the Fed to set interest rates higher than it otherwise would have.
As a candidate this year, Trump made sweeping promises about cutting taxes. He also said he would impose sweeping tariffs, which analysts say could have an uncertain economic impact, potentially increasing inflation but also boosting revenues and slowing economic growth.
But investors have mostly focused on the portions of the 2017 tax law set to expire at the end of next year. Many expect the Republican-controlled Congress and White House to extend all of them, cutting projected revenues by about $4 trillion over the next decade.
President Biden wants to extend the tax cuts only to households making less than $400,000, and let taxes rise for those above that threshold. Administration officials say any extensions of the tax cuts must be matched by higher taxes on high-income households and businesses, a goal that could be difficult even if Democrats do well in November.
The yield on the benchmark 10-year Treasury note rose to more than 4.45% last week, up from 4.287% before the Biden-Trump debate. The yield pared some of those gains on Wednesday after a weaker-than-expected report on U.S. services sector activity, settling at 4.346%.
Doubt
Some analysts have questioned the assumption that Republican wins should translate into higher returns.
“The range of potential fiscal deficits under different election outcomes is fairly narrow,” Goldman Sachs analysts wrote in a recent report. Moreover, they wrote, Trump’s plan to raise tariffs could push revenues lower by hampering economic growth.
Investors also said Treasuries may already be ready for a sell-off after rallying last month on the back of encouraging inflation data.
The rise pushed the yield on the 10-year note 0.5 percentage point lower than the two-year note — a threshold that also triggered previous rounds of selling.
The recent sell-off has led to particularly sharp gains in yields on longer-dated bonds, suggesting that some traders may have just started to unwind their previous positions. However, such a move is also what many expect from a shift toward higher deficit expectations.
Investor expectations
Treasury yields broadly reflect investors’ expectations about the average short-term interest rates set by the Federal Reserve over the life of the bond. But those expectations are more realistic for short-term Treasuries, making them less vulnerable than longer-term bonds to an increase in the supply of bonds or concerns about longer-term inflation expectations, the newspaper reported.
Longer-term yields also rose faster than short-term yields after Republicans won control of Congress and the White House in the November 2016 elections. It was known at the time as the “Trump deal.” But it happened again in January 2021, when Democrats won two elections in Georgia that gave them control of the Senate after they had already won the House and the presidency.
In both cases, investors’ bets on more expansionary fiscal policies proved justified. Republicans passed their tax cuts in 2017, while Biden signed a massive Covid-19 relief package less than two months after his inauguration.
Many investors still expect economic data and signals from the Federal Reserve to play the biggest role in determining Treasury yields in the coming months.
direct impact
In turn, the head of global markets at Cedra Markets, Joe Yarak, said in exclusive statements to the Sky News Arabia Economy website that the possibility of Trump winning the US elections scheduled for the end of this year will have a clear impact on the US bond market.
He stressed that given the recent debate between Trump and Biden, the yield on US Treasury bonds rose after that, and their prices fell due to several factors.
He points out that markets always see Trump as the type preferred by the economy, so his arrival in power will lead to a strong labor market, a halt to illegal immigration with Mexico, and securing the borders, which will constitute an inflationary pressure factor.
He explains that the US state will witness additional spending during his term if he wins, all of which are inflationary factors and put pressure on bond prices, so his victory will lead to an additional increase in debt and lower bond prices.
lack of gravity
Financial markets expert Hanan Ramses also expects, in exclusive statements to the Sky News Arabia Economy website, that Trump’s victory in the US elections in November will have a negative impact and will increase the abandonment of US Treasury bonds.
These expectations are justified by Trump’s targeted plans to reduce taxes and raise customs, which will lead to higher inflation rates, which will have a direct impact on US bonds, in addition to the impact of his hostile policies with many countries, noting that the Trump era witnessed an economic war between America and China, which led to an increase in China’s sales of US Treasury bonds.
She explains that his arrival to power will lead to more sales in US Treasury bonds, especially in light of his interest in monetary easing policies and the stock market, all of which are factors that will lead to maintaining the reduction in interest rates and thus negatively affecting bonds.
Bill Gross, the famous bond investor, believes that a Donald Trump victory in the US presidential election would be “more pessimistic” and “destabilizing” for bond markets than the re-election of Joe Biden.
According to a report in the Financial Times, which was reviewed by Sky News Arabia, Gross, nicknamed the “Bond King,” said that Trump’s return to the White House would exacerbate the growing US deficit. “Trump is the most pessimistic of the candidates simply because his programs call for continued tax cuts,” Gross added, although he pointed out that Biden’s presidency was also responsible for the huge budget deficit due to trillions of dollars in spending.
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