A Trump win could push US bond yields higher - BCA Research

Published 23/10/2024, 14:04
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Investing.com -- US Treasury yields have touched three-month highs as traders gauge the path ahead for Federal Reserve interest rate policy this year and assess the potential outcomes of the US presidential election.

By 08:38 ET (12:38 GMT), the yield on the benchmark US 10-year Treasury note had risen by 0.04 percentage points to 4.246%, adding on to a string of recent gains since the Fed slashed its key federal funds rate by 50 basis points to range of 4.75% to 5% in September.

Immediately after the Fed's jumbo reduction, traders were pricing in as much as a full percentage point in further drawdowns by January. However, strong recent economic data and deficit concerns have led investors to temper these expectations, with markets now seeing closer to a half-point in cuts.

Yields, which typically move inversely to prices, have subsequently sold off, pushing the dollar up to multi-month peaks and weighing on other currencies like the euro and yen.

In a note to clients on Wednesday, analysts at BCA Research said the re-emergence of the so-called "Trump trade" has also fueled the jump in yields so far this week.

Prediction markets like Kalshi and PredictIt show Trump is now the clear favorite to win the US presidential election on Nov. 5. However, these bets have received some scrutiny because they have diverged from national polling averages, which suggest that Trump's Democratic rival Kamala Harris holds a narrow advantage with only weeks of campaigning left.

Crucially, both candidates are all but tied in several key battleground states that are tipped to have a heavy impact on the election.

A victory for Trump, who has called for tax cuts, looser financial rules and sweeping tariffs, could drive inflation higher and mean US rates may not fall as quickly as initially anticipated, analysts have said.

Even still, hopes for a so-called "soft landing" in the US economy -- in which the Fed cools inflation without sparking a broader downturn in growth or labor demand -- are "priced in yields, with room for downside over the cyclical horizon," the BCA Research analysts said.

"A Trump election could push yields higher, but our team recommends extending portfolio duration further should the 10-year yield breach the current level of the federal funds rate," they wrote. "A sustainable jump above the fed funds rate would only happen if inflation reaccelerates meaningfully."

Ultimately, they argued that even though the outlook for Treasuries "hinges on the US election," a win for Trump is "no guarantee of a sustained bond selloff."

"Slapping tariffs on trade partners will be bad for global growth, and thus deflationary, which would put a cap on yields even if US inflation could accelerate in the short-term," the analysts said.

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