The Barclays report anticipates “increases in implied volatility in the belly of the yield curve”. — Bloomberg
NEW YORK: Interest rate strategists at Barclays Plc have added a new wrinkle to the so-called Trump Trade, and introduced a possible “Harris Trade” as well.
Research by Amrut Nashikkar and Maria Chiara Russo published on Tuesday showed that interest rate volatility typically rises in the three months after a US election, in which the presidency is won by the challenger.
However, rate volatility falls when the White House remains in the hands of the party of the incumbent, which some polls suggest is a possibility after Vice-President Kamala Harris replaced President Joe Biden atop the Democratic ticket.
Wall Street so far has centred on trades that could do well should Republican Donald Trump reclaim the presidency, including bets on higher longer-term bond yields in response to anticipated looser financial policy.
The Barclays report, citing the historic market reaction to a change in control of the White House, anticipates “increases in implied volatility in the belly of the yield curve”.
A win by the Democrats provides a different opportunity, as a drop in volatility is currently underpriced by markets, the strategists said.
They studied patterns in implied and realised interest rate volatility over the past 30 years, or seven presidential elections since 1996.
“In the upcoming election, the outcome of which will also likely drive the direction of rates – higher under a Republican sweep, lower under a more Democrat-friendly outcome, in our view – this likely means more volatility with higher rates, and less volatility with lower rates,” Nashikkar and Russo wrote.
“That is not how vol markets are priced for a significant part of the vol surface.”
A trader who wanted to wager on a decline in interest rate volatility sometime after November could, for example, implement an options strategy designed to do well if rates trade within their recent ranges.
Policy changes under former President Trump, including higher tariffs, could increase realised volatility for 10-year treasuries by as much as 30 basis points in the post-election months should he win, according to the Barclays report.
It assumes a Harris victory likely would bring policy continuity with the outgoing Biden administration, and volatility would decline by around 10 basis points.
The research is the latest in a raft of analyses produced by Wall Street firms highlighting the impact of the 2024 presidential election on markets.
The consensus “Trump trade” is based on the idea that his policies, if elected, will be inflationary, driving up bond yields, the US dollar and sectors like banking and energy.
Nashikkar and Russo estimate that the historical rise in volatility after a change in presidential parties stems from uncertainty around three key issues: inflation, central bank policy and the level of long-term rates.
Forecasts for the consumer price index, three-month treasury bill rate and 10-year treasury yield, they note, saw greater dispersions during election years that had a presidential party change.
“Realised volatility was significantly higher across tenors” in cases where the political party of the election winner represented a shift, Nashikkar and Russo wrote.
The move was particularly acute for the 30-year tenor, suggesting greater risks to the outlook for longer-term bond yields. — Bloomberg
