After driving Treasury yields higher for weeks, traders are taking chips off the table before the US election, reluctant to take bold bond bets with the presidential race too close to call.
The theme of retrenching has dominated of late: Speculators have been liquidating Treasuries futures positions, and a closely watched JPMorgan Chase & Co. survey showed its Treasuries clients trimming both long and short wagers. The message, at the start of this momentous week — and with Wall Street rolling out a diverse set of scenarios for how bonds might react to the election aftermath — is that confidence around the path forward is dim.
Traders are all but certain that the Federal Reserve will cut interest rates by a quarter-point on Thursday, but beyond that, the outlook heading into 2025 hinges on the results of the presidential and congressional votes, which will shape policies from taxes to tariffs and potentially the Fed’s stance for years to come.
“There’s lower conviction in terms of the outcome,” said Angelo Manolatos, a rate strategist at Wells Fargo Securities. “It just means less risk-taking.”
For investors charting their next step, and possibly facing days or weeks of limbo before all the races are called, the other complication is that Wall Street is producing sharply varying projections on what to expect.
GOP Sweep
What strategists agree on is that a GOP sweep would be unambiguously painful for bondholders, who are already coming off their worst monthly loss in two years.
In a scenario where Republicans control Congress and former President Donald Trump retakes the White House, the expectation is that he will push through his tax-cutting and tariff plans, widening the federal deficit and re-igniting inflation.
Growing speculation around such an outcome, combined with signs of economic resilience, helped push 10-year yields to a four-month high of almost 4.4% ahead of the vote.
Divided Washington
If the October bond rout was driven by bets on a Republican sweep, a win by President Kamala Harris may set up the potential for a rally.
Barclays Plc strategists say a Harris victory combined with Republicans taking one or both chambers of Congress would cause bonds to strengthen because it would remove the risk of new tariffs and “significant” deficit expansion. It would also present a bond-bullish risk of a fiscal cliff materializing that could push 10-year yields down by as much as a quarter-point.
What’s less clear is how things will unfold in other electoral outcomes. The challenge is two-fold: netting out the market impact of various policy mixes, and also figuring out what investors have already priced in.
In the scenario of a Trump victory with a divided Congress, Deutsche Bank Securities strategists expect yields to fall across board, in part on the view that would bring less fiscal stimulus. Yet Barclays research points to the prospect that the Republican would be able to impose tariffs, but would struggle to push tax cuts through Congress, a combination that would lift short-term yields and leave longer-term rates unchanged.
Democratic Sweep
And then there’s the case of a Democrat sweep. Wells Fargo strategists anticipate that result would lead to more government spending, pushing yields higher. RBC Capital, on the other hand, says such a backdrop would be the most bullish for bonds because it would lead to corporate tax hikes, amp up a “less business-friendly” environment and undermine risk appetite.
What it comes down to, said Matthew Raskin at Deutsche Bank Securities, is that it’s almost impossible to predict with any great precision how the market will react.
“Even when we know what policies are going to be enacted, we have a fair degree of uncertainty about what the implications of those policies, particularly tariffs, will be for financial markets, including rates,” said the firm’s head of US rates research.
The only thing that investors seem to have high confidence in is that the bond market is headed for a turbulent stretch.
The ICE BofA Move Index, a meaure of bond-market volatility, has risen to the highest in a year, reaching a level that is well above the lead-up to the elections in 2020 and 2016.
Vishwanath Tirupattur, chief fixed-income strategist at Morgan Stanley, said he’s waiting for the event risks to pass before making a move.
“I would not want to take positions on duration at this point,” he said. “It’s important to keep in mind that there’s a very big difference between campaign promises and what can be done.”
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