Morgan Stanley recently stated that Donald Trump's chances of winning the presidential election are increasing, making the steepening of the yield curve an attractive bet, as economic growth may slow down and inflation may accelerate in this scenario.

Regarding the bet on the "Trump Trade," including strategists Matthew Hornbach and Guneet Dingra, among others, at Morgan Stanley wrote in their latest report that the likelihood of Trump winning has increased after the first debate of the U.S. election last week, which will draw more attention to his immigration and tariff policies.

It is understood that the original "Trump Trade" was named after his victory in the 2016 presidential election, which saw the U.S. stock market, bond yields and the dollar all soar at the same time.

"Since the debate, there has been a noticeable relative change in the probability of President Trump defeating President Biden. The sharp change in probability favors President Trump, which could be a unique catalyst to make the curve steepening bet attractive." they wrote.

At the same time, bond traders are preparing for similar results, as the inversion of the two-year and 10-year U.S. Treasury yields has narrowed at the fastest pace since January last week.

The realignment of bets could complicate the prospects for the U.S. Treasury market. As Trump vows to expel undocumented immigrants and raises the threat of increasing tariffs, traders are digesting the risks of slowing economic growth and accelerating inflation.

Morgan Stanley strategists wrote, "The market now has to deal with the growing likelihood of changes in immigration and tariff policy. U.S. economic growth has cooled, making it more likely that the market will digest the impact of a rate cut by the Fed. Against a backdrop of growing concerns over the deficit, a Republican victory could bring upward risk to long-term U.S. Treasury yields."

It is reported that one of Trump's key economic plans is to commit to making his 2017 tax cuts permanent. According to the U.S. think tank Committee for a Responsible Budget, this will cost $4 trillion over the next 10 years. "Bond King" Gross has previously warned that if Trump returns to the White House, it will exacerbate the ever-expanding U.S. deficit.

In view of this, Morgan Stanley strategists suggest betting on the steepening of the two-year and 10-year U.S. Treasury yield curve. The outcome of last week's presidential debate sparked a series of discussions among analysts about the "Trump Trade." Barclays Bank recommends that investors hedge against inflation in the U.S. bond market.

Naokazu Koshimizu, an analyst at Nomura Securities, believes that the Trump administration favors fiscal expansion and a weaker dollar. This, coupled with a preference for dovish Fed chairs, will lead to a steeper U.S. yield curve.

In his latest report released on Monday, he wrote, "If the Trump administration imposes additional tariffs alone, it will be difficult to cover fiscal expansion, and the possibility of issuing more bonds will increase. And if inflation returns, the Fed's policy interest rate will remain high, with the expected increase in interest payments leading to a larger fiscal deficit."

Editor / jayden