Wall Street maps out what a Trump election victory would mean for the bond market
By Carter Johnson and Michael Mackenzie
Financial giants from Goldman Sachs & Co. to Morgan Stanley and Barclays Plc. are taking a fresh look at how a Donald Trump victory in November could impact the bond market.
After last week’s debate damaged President Joe Biden’s re-election chances, Wall Street strategists are urging their clients to prepare for continued inflation and higher long-term bond yields.
At Morgan Stanley, strategists including Matthew Hornbach and Guneet Dhingra argued in a weekend note that “the time is now” to bet on rising long-term rates relative to short-term rates.
Morgan Stanley said Trump’s rise in the polls since Thursday’s debate means investors should be mindful of economic policies that could lead to further rate cuts by the Federal Reserve, along with a Republican victory that would lead to fiscal expansion and push up long-term Treasury yields.
Barclays, meanwhile, said the best response to the rising prospects of a Trump victory is to hedge against inflation. Strategists Michael Pond and Jonathan Hill wrote Friday that the clearest expression is a bet that five-year Treasury inflation-protected securities, or TIPS, will outperform standard five-year notes.
Buy-side investors like Jack McIntyre, portfolio manager at Brandywine Global Investment Management, are paying increasing attention to this.
McIntyre said he is “concerned that the bond watchdogs are coming out prematurely in response to the debate setback.” The chances of a Republican victory in November will increase due to a combination of “Biden’s performance, weaker data and higher oil prices.”
US yields fell on Tuesday after rising to their highest level in weeks a day earlier, a move traders said was a lingering aftereffect of the increased likelihood of a second Trump term last week.
US Treasury losses widened on Monday after the Supreme Court ruled in a case that reduces the chances of Trump being tried before the November election on charges of trying to overturn the 2020 election.
The rise in government bond yields was led by the longest maturities. Yields on 30-year government bonds rose as much as nine basis points to a high of 4.65%, the highest level since May 31.
Not everyone on Wall Street is convinced that higher long-term government bond yields and steeper yield curves are inevitable.
“While a term premium-driven selloff is the consensus view on how U.S. yields should react to a Republican victory, we see a case for risk-off,” Goldman Sachs strategists led by George Cole and William Marshall wrote after the debate. They see investors’ focus shifting from fiscal spending to the risks of higher rates, which are likely to weigh on productivity and growth as the election approaches.
Kathy Jones, chief fixed income strategist at Charles Schwab, said it is unclear what shape Congress will take after November, and assumptions about the impact of Trump’s policies on markets are shaky.
“A shift in the narrative about what the post-election policy will be is probably the biggest risk to the Treasury market,” Jones told Bloomberg Television on Monday. “I just think it’s too early. Presidential candidates can say a lot of things during the campaign, but they have to get those things through Congress.”
First print: 02 Jul 2024 | 18:19 IST