Billions of dollars are directly influencing the gambling odds of the US presidential election, and these odds are rapidly becoming the key driving force behind the world's largest and most liquid bond market and even the global forex market...

This cross-domain correlation may sound exaggerated, but market charts clearly do not lie.

Industry analyst Masaki Kondo stated this week that the price of Polymarket's prediction platform for Trump's election victory probability is currently not only playing an important role in setting recent price signals in the US treasuries market of $28 trillion, but also in the global forex market.

Whether it is the benchmark 10-year US Treasury yield or the USD/Mexican Peso (the currency pair most susceptible to election results), it seems to be pricing in an increasing probability of Trump winning the US election.

However, Trump's 'surefire' prospects are currently only reflected on prediction platforms like Polymarket that have a gambling nature, while traditional institutional polls have almost completely failed to reflect this point—many media polls still show Harris leading.

The chart below is the best proof— the benchmark 10-year US Treasury yield has been closely tracking the probability of Trump's election victory on the Polymarket platform.

According to Polymarket's data, as of this Tuesday, Trump's probability of winning the election reached 65% at one point, with a staggering 30 percentage point lead over Harris.

In the forex market, the trend of the US dollar against the Mexican peso has been closely tracking the pricing of the election on the Polymarket platform.

Even the former chief commentator of the Financial Times and columnist for Bloomberg, John Authers, now has to admit the role that Polymarket plays in bond pricing. Authers said:

Surprisingly, according to Polymarket's data, in the past few months, the 10-year US Treasury bond yield has actually been tracking Trump's probability of winning. Polymarket is an offshore prediction market that seems to be influencing Wall Street's views, although it may be overly influenced by a few large bettors.

In fact, as we mentioned earlier this morning, although the Fed cut interest rates by 50 basis points last month, this aggressive rate cut surprisingly produced an "interest rate hike" effect -- the 10-year US Treasury bond yield has actually risen by over 50 basis points since that rate decision meeting. The prospect of Trump winning the election seems to be a major driving force behind the rise in US bond yields.

Memories from eight years ago

For some US bond traders, memories from a distant eight years ago may still seem quite fresh today:

About a month after Trump won the last election in November 2016, the 10-year US Treasury bond yield surged by nearly 80 basis points.

Indeed, one could argue "this time is different" because back then the spike in US bond yields was partly driven by the start of the Fed's tightening cycle, whereas the current direction of Fed interest rate policy is completely opposite. However, there is an almost identical subconscious reaction - people are worried that the unpredictable Trump as president will ignite US inflation.

Under the Trump administration, especially in the background of the "Republican Red Tide" (Trump taking over the White House while the Republicans dominated both houses of Congress), the US deficit is likely to further increase significantly, which will curb the Fed's further rate cuts. In addition, Trump's proposal to impose high tariffs on imported products is viewed as a major bearish signal for non-US currencies such as the Mexican peso.

It is worth mentioning that, although as of now, the shockwaves of Trump's rising odds of winning on Polymarket have only caused significant ripples in the bond and forex markets, some industry insiders are also reminding investors to focus on the overall trend of the US stock market, whether the stock market will eventually pay attention to the continuous selling pressure in the bond market...

Goldman Sachs trader Ryan Sharkey has warned that historically, when there is a 2 standard deviation change in the 10-year US Treasury yield (equivalent to a volatility of around 60 basis points in a month like today), stock market returns will start to suffer.

As summarized by Goldman Sachs, given that the 10-year US Treasury yield has already risen by 46 basis points in the past month, based on this simple rule of thumb - if the 10-year US Treasury yield rises to 4.30%, the situation will become tricky. The speed of the subsequent increase in yields is crucial, and close attention should also be paid to the performance of real yields.

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