Source: Wall Street See
Concerns about the expansion of the US fiscal deficit and the increasing government debt burden after Trump's election may limit the rebound of bonds, while the Fed's increasing proximity to interest rate cuts may put pressure on the rise of long-term US debt.
As the possibility of Trump's election increases, the market is placing bigger bets that US bond yields will stay high until November.
Previously, the current US President Biden performed poorly in the first debate with Trump, leading to an increase of expectation for Trump's re-election, with the 10-year US Treasury yield rising by about 6% after the debate to reach 4.34%.
The market is generally concerned that if Trump is elected, his trade policies and economic measures (including raising import tariffs, expanding fiscal spending, and reducing fiscal tax revenues) will lead to inflation and may restrict the rebound of bonds.
Perhaps considering such market concerns, the Trump team has previously stated publicly that it will implement a pro-growth policy after its inauguration, aiming to lower interest rates and reduce the fiscal deficit.
However, this does not seem to dispel the market's concern, and some analysts still warn of the risk of lower US bond yields.
Anna Kelly, spokesperson for the Republican National Committee, stated in a statement:
"The market's reaction to Trump's victory in the debate reflects the market's expectations for President Trump to achieve strong growth and low inflation again."
Mary-Therese Barton, Chief Investment Officer of Fixed Income of Pictet Asset Management, stated:
"The market's focus is shifting to fiscal and bond movements, and the interest rate cut cycle may be less forceful than expected, with more focus on the long end."
As the Federal Reserve seems to be getting closer to interest rate cuts, short-term US bonds that are more sensitive to monetary policy may rebound, but at the same time, the trend of long-term government bonds that reflect economic growth, inflation and fiscal prospects may become more uncertain.
Anders Persson, Chief Investment Officer of Nuveen, stated:
"The market headwinds will begin to weaken and investors will focus more on the interest rate cut cycle. But due to the uncertainty of the election results and inflation, the 10-year US Treasury bond will be more difficult to predict."
Moreover, interest rate cut expectations have been repeatedly suppressed and gradually converged since the beginning of the year. Some investors may have lost patience with the bond market, which may also pose resistance to the rebound of US bonds.
Mike Cudzil, Managing Director and General Investment Portfolio Manager of PIMCO, one of the world's largest bond investors, pointed out: Regardless of who wins the election, whether it is the Republican or the Democratic Party, the loser will be the fiscal deficit.
Editor / jayden