Financial institutions such as Goldman Sachs, Morgan Stanley, and Barclays are reassessing the potential impact of a Donald Trump victory in the upcoming election on the bond market. Following last week’s debate, which negatively affected President Joe Biden’s chances of winning re-election, Wall Street strategists are advising clients to prepare for persistent inflation and higher long-term bond yields. In a weekend note, Morgan Stanley’s strategists, including Matthew Hornbach and Guneet Dhingra, argued that now is the opportune moment to bet on long-term interest rates increasing in comparison to short-term rates. With Trump’s surge in the polls after the debate, investors must consider economic policies that could result in additional rate cuts from the Federal Reserve, coupled with a Republican sweep leading to fiscal expansion and exerting upward pressure on longer-term bond yields, according to Morgan Stanley.
Barclays suggests hedging against inflation as the best response to the increasing likelihood of a Trump victory. According to strategists Michael Pond and Jonathan Hill, one way to express this is by betting that five-year Treasury inflation-protected securities (TIPS) will outperform standard five-year notes. This strategy has caught the attention of buy-side investors like Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. McIntyre expressed concern that the bond market may react early to the fallout from the recent debate, leading to higher odds of a Republican sweep in November due to Biden’s performance, weaker data, and higher oil prices. In response to last week’s rise in the chances of a second Trump term, US yields slipped on Tuesday after reaching their highest levels in weeks the day before.
Treasuries experienced further declines on Monday following a Supreme Court ruling that will reduce the likelihood of Trump facing trial before the November election for his alleged attempts to overturn the 2020 election results.
The increase in Treasury yields was mainly driven by longer-term maturities, with 30-year bond yields rising by as much as nine basis points to a session high of 4.65%, the highest level since May 31.
However, not all experts on Wall Street believe that higher long-term Treasury yields and steeper yield curves are inevitable.
Goldman Sachs strategists, led by George Cole and William Marshall, argued that while a sell-off driven by term premia has been the consensus on how US yields would react to a Republican victory, there are arguments for a flattening of risk. They believe that investor focus will shift away from fiscal spending and towards the risks posed by higher tariffs, which are likely to have a negative impact on productivity and growth as the election approaches.
Kathy Jones, the chief fixed-income strategist at Charles Schwab, expressed uncertainty about the impact of Trump’s policies on the markets due to the unclear makeup of Congress after the November elections. She believes that the biggest risk to the Treasury market is a shift in the narrative about post-election policies. Jones emphasized that it is too early to make assumptions as presidential candidates may make promises on the campaign trail, but ultimately need to navigate through Congress to implement their policies. The article also includes updates on yield levels, with contributions from Robert Fullem, Ye Xie, and Masaki Kondo.