Packs of freshly printed US$20 notes are processed for bundling and packaging at the US Treasury’s Bureau of Engraving and Printing. — AFP
NEW YORK: After driving Treasury yields higher for weeks, traders are taking chips off the table before the US election, reluctant to take bold bond bets with the presidential race too close to call.
The theme of retrenching has dominated of late: Speculators have been liquidating treasuries futures positions, and a closely watched JPMorgan Chase & Co survey showed its treasuries clients trimming both long and short wagers.
The message, at the start of this momentous week, and with Wall Street rolling out a diverse set of scenarios for how bonds might react to the election aftermath, is that confidence around the path forward is dim.
Traders are all but certain that the Federal Reserve (Fed) will cut interest rates by a quarter-point on Thursday, but beyond that, the outlook heading into 2025 hinges on the results of the presidential and congressional votes, which will shape policies from taxes to tariffs and potentially the Fed’s stance for years to come.
“There’s lower conviction in terms of the outcome,” said Angelo Manolatos, a rate strategist at Wells Fargo Securities. “It just means less risk-taking.”
For investors charting their next step, and possibly facing days or weeks of limbo before all the races are called, the other complication is that Wall Street is producing sharply varying projections on what to expect.
What strategists agree on is that a Grand Old Party sweep would be unambiguously painful for bondholders, who are already coming off their worst monthly loss in two years.
In a scenario where Republicans control Congress and former President Donald Trump retakes the White House, the expectation is that he will push through his tax-cutting and tariff plans, widening the federal deficit and re-igniting inflation. Growing speculation around such an outcome, combined with signs of economic resilience, helped push 10-year yields to a four-month high of almost 4.4% ahead of the vote.
If the October bond rout was driven by bets on a Republican sweep, a win by vice-president Kamala Harris may set up the potential for a rally.
Barclays Plc strategists said a Harris victory combined with Republicans taking one or both chambers of Congress would cause bonds to strengthen because it would remove the risk of new tariffs and “significant” deficit expansion.
It would also present a bond-bullish risk of a financial cliff materialising that could push 10-year yields down by as much as a quarter-point.
What’s less clear is how things will unfold in other electoral outcomes.
The challenge is two-fold: netting out the market impact of various policy mixes, and also figuring out what investors have already priced in.
In the scenario of a Trump victory with a divided Congress, Deutsche Bank Securities strategists expect yields to fall across board, in part on the view that would bring less financial stimulus.
Yet Barclays research points to the prospect that the Republican would be able to impose tariffs, but would struggle to push tax cuts through Congress, a combination that would lift short-term yields and leave longer-term rates unchanged.
And then there’s the case of a Democrat sweep. Wells Fargo strategists anticipate that result would lead to more government spending, pushing yields higher. — Bloomberg
