Treasuries rose to a 3-month high – and the election could push them further higher

Topline

Treasury yields hit their highest levels since mid-summer on Tuesday as the bond market continued its surprise move following the Federal Reserve’s rate cut last month – and the November election could put further pressure on bonds.

Donald Trump (left) and Federal Reserve Chairman Jerome Powell in 2017.

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Key facts

The yield on the benchmark 10-year U.S. Treasury note rose above 4.2% for the first time since July 26 in morning trading, while the 2-year Treasury yield hit its highest level since Aug. 20 at 4.06%, according to CNBC.

That caps a stunning rise in bond yields after the Fed cut its target for the federal funds rate by 0.5 percentage points on Sept. 18, as Treasuries serve as a gauge of market expectations for monetary policy, meaning investors now expect higher interest rates in the coming years. than before the Fed cut rates sharply.

The 2-year yield rose from about 3.65% just before the Fed cut rates, and the 10-year yield rose from about 3.6%.

Higher bond yields mean lower costs for existing bonds as investors demand higher annual payments to hold government debt, and higher government bond yields work their way through the broader economy as they serve as a baseline for many types of loans, including corporate loans – see The stock market sell-off is being driven by higher yields – and consumer loans such as mortgages, which rose to a two-month high last week.

What to pay attention to

There is reason to believe the election could put further upward pressure on Treasuries, as the outcome could determine whether federal borrowing increases. JPMorgan Chase strategists forecast higher 10-year yields following three of four federal election scenarios: former President Donald Trump’s victory with a divided Congress, Trump’s victory with a Republican House and Senate, Vice President Kamala Harris’ victory with a divided Congress and Harris’ victory with a Democratic House and Senate. JPMorgan estimates that a Harris win with a divided Legislature would have no impact on the 10-year yield, a Trump win with a divided Congress would lift it by 10 basis points, a Democratic win would lift it by 20 basis points, and a Republican overhaul would lift it by 10 basis points. 40 basis points, which would leave the 10-year rate at about 4.6%, a level not seen since May and higher than at any time between 2008 and 2022.

Important Quote

A Democratic or Republican victory next month “would lead to fiscal expansion from the divided government baseline” and “fiscal concerns… would likely return to the forefront” for investors, JPMorgan strategists Jay Barry and Srini wrote in a recent note. Ramaswamy. clients. As for the reason for the stronger bond market reaction to GOP policies, strategists cited a study by the nonpartisan Committee for a Responsible Federal Budget that found Trump’s economic proposals would increase the U.S. national debt by $7.5 trillion, up from $3.5 trillion. dollars for Harris’ policies. This difference has a lot to do with the tax cuts Trump talked about.

Tangent

An analysis from investment bank UBS released earlier this month predicted a shift in either direction would be worse for US stocks than a split federal government, while a scenario in which Trump could pass his proposed massive tariffs levying a 60% tax on Chinese imports and a 10 percent tax on other imports is a much worse outcome for stock prices.

Key background

The U.S. national debt stands at $35.8 trillion, up from $19.6 trillion at the end of fiscal year 2016 before Trump took office and up from $27 billion at the end of fiscal year 2020 before Joe Biden’s presidency, according to the Treasury Department. Treasury bonds serve as a vehicle for the U.S. to finance government programs, and the steady rise in yields reflects growing investor concern about the long-term consequences of rising government debt. Thus, these pseudo-loans provided by investors to the government become more expensive as the government accumulates more debt, just as a debt-ridden company or consumer is likely to have higher borrowing costs. A far less worrying factor has also pushed yields higher in recent weeks, with bond market weakness partly a reflection of increased inflows into the stock market as Wall Street shakes off recession fears and expresses confidence in the U.S. economy.