Investing.com -- BCA Research analysts said investors should be cautious about the recent rise in US Treasury yields, attributing the latest increase to shifts in political sentiment rather than economic fundamentals.
"The most likely driver of this week’s increase in yields is the rising odds of a Donald Trump victory in next month’s US election," BCA analysts noted, referencing recent swings in betting markets and polling data.
While solid US economic data explains the initial rise in the 10-year Treasury yield from 3.65% to just above 4.00%, the jump to 4.20% occurred "without an obvious economic catalyst," said the analysts.
They believe this surge reflects growing market expectations for Trump’s potential return to the White House.
However, BCA advises against betting on sustained high yields following the election. "Yields have further near-term upside if Trump does win, but we would view any increase as an opportunity to add duration, positioning for lower yields in 2025."
The analysts argue that tariffs—expected to be one of the first policies implemented by a Trump administration—would likely exert deflationary pressure, worsening the economy’s disinflationary trend.
Despite the political uncertainty, BCA maintains a bullish outlook for 2025. "Our baseline expectation is that QT will come to an end sometime in H2 2025."
The firm says investors should keep cyclical positions with above-benchmark portfolio duration and maintain Treasury curve steepener positions.
BCA also suggests taking a tactical position in June 2025 fed funds futures, citing two key factors. First, a Harris victory could drive yields lower, and second, even under a Trump presidency, the Federal Reserve is unlikely to significantly alter its current policy path.
"Any increase in bond yields around the election will represent a buying opportunity," the analysts concluded.