Investing.com – The move higher in U.S. Treasury yields following last week’s debate between President Joe Biden and Republican challenger Donald Trump could be a sign that the bond market is pricing in a Trump victory in November’s presidential election, according to analysts at Yardeni Research.
On Monday, the benchmark index touched 4.48%, its highest since May 31, after holding at 4.29% before the debate. Yields typically move inversely to prices.
The yield rise came despite Friday’s personal consumption expenditures price index — the Fed’s preferred measure of inflation — pointing to a continued slowdown in inflation. That trend was seen as a boost to hopes that the Fed will cut interest rates from their highest levels in more than two decades later this year.
“We believe the bond market is reacting to the increasing likelihood of President Donald Trump winning a second term in the White House,” the analysts said.
Analysts said bond investors expect Trump’s return to power could lead to a combination of “stronger economic growth” and “higher inflation.”
Meanwhile, if Trump chooses to extend the 2017 individual and estate tax cuts, which are set to expire next year, analysts expect the Treasury to have to borrow more, “which would unleash a flood of supply that would likely outpace demand at current rates.”
Analysts noted that the rise in yields is likely to be driven by the long end of the yield curve, which suggests that markets’ long-term economic outlook is changing but their short-term expectations for Fed interest rates “have not changed much.”