In the absence of confirming the composition of the House of Representatives, the American Republican Party has emerged as the clear winner of the elections, achieving, in addition to the presidency, control of the Senate. This was probably the scenario most likely to occur before the polls closed. And yet, the market has reacted as if it were not expecting it.
And proof of this is what investors have done with debt assets, fleeing from American bonds despite the fact that they were already trading at losses this year, and buying other sovereign references such as European ones. The market is positioning itself in an environment of greater tax cuts and more public spending, in addition to tariffs, all inflationary measures that will slow the rate of rate cuts by the Fed. The monetary institution, which ends the meeting this Thursday , will cut rates by 25 basis points, leaving them at 4.75%.
The 10-year American bond, in the middle of the session, falls back up to 20 basis points in its biggest drop since March of last year. Thus, in the secondary market, profitability is already required from T-Note of 4.46%, the largest since Juneincreasing the losses in the year of an asset called to recover after last year’s collapse and with the prospect that the beginning of the rate cuts would push up the prices of sovereign bonds. These losses already exceed 4.5% since January 1.
“The fixed income market has been worried about the election result for some time now and is now being reflected in volatility. The 10-year US bond has increased its yield by 80 points since mid-September,” they explain in Julius Baer. “Despite this strong increase in yieldsit is difficult to say that an attractive entry point has been reached and we do not recommend starting to extend durations excessively since the refinancing risks can be reduced with medium durations, from 3 to 7 years,” they add.
Regarding the independence of the decisions that the Federal Reserve can carry out from now on, analysts agree that Trump will not be able to intervene, as he has hinted in some statement. “Trump has limited options to influence: he can publicly pressure the Fed and nominate members to the committee, but his room for maneuver on the institutional structure is minimal since he would need 60% of the Senate,” they explain from Flossbach von Storch.
Looking ahead to the coming months, the market is only counting on this Thursday’s cut and no longer sees another one at the Fed meeting in December. In fact, it only anticipates 100 basis points less a year from now. “It is widely believed that both parties would continue to run budget deficits and maintain fiscal stimulus. The effect of this on the Fed may take some time to become clear and the market must now consider whether the rise in Treasury yields could represent an extra problem for the economy and a headwind for the soft landing that is still discounted,” they explain in Janus Henderson.
Mixed tone in Europe
Trump’s victory not only has implications for US markets but there are consequences for practically the entire planet. On this side of the Atlantic, the reaction to the White House results leaves a mixed tone in fixed incomewith sales in all the main references except the German one, which means risk premiums have increased.
“In Europe, the main lesson is that the ECB will have to accelerate its rate cuts since it is unlikely that the economy will improve due to the possible impact on the export sector that eventual tariffs will have,” AXA IM points out. “The ECB is the only institution with the capacity to respond quickly,” they add.
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