10-Year US Treasury Yields
The bond market is usually the first to figure things out, but even that market is suffering from political turmoil and economic uncertainty right now.
Notably, yields on long-term Treasury bonds jumped immediately after the debate on June 28, signaling a Republican sweep along with more tax cuts and a deficit of about 6.5% of GDP over the next five years.
Then the market reconsidered. Whether that was due to the conflicting currents, the long timeline before the election or the possibility of Biden withdrawing is debatable. Bank of Montreal believes the market is also factoring in the secondary effects of a Republican victory:
In the wake of the Biden-Trump debate, US Treasury prices surged on supply and inflation concerns. Once the dust had settled, the emotional response to Trump’s improved odds of victory appeared to be a stabilizing factor for the market – the logic being that any revival of inflationary pressures would slow the FOMC’s normalization (i.e. tapering) process through the latter part of 2025 and beyond. We believe the initial response to Biden’s withdrawal will be gradually bond-friendly, and likely to continue to be more aggressive. Simply put, a reverse impulse.
To translate this into Forex, the result would be:
- Trump positive = dollar up
- Biden/Democrat Positive = Dollar Down
I agree with this sentiment but I’m not getting carried away with the idea that this will dominate the markets. Another underrated race in 2024 is the House of Representatives. Betting sites have the Democrats just a hair behind in taking control of the House despite all the turmoil, and that could quickly turn into a divided Congress and the inevitable gridlock that comes with it.
Another thing to keep in mind is that bond seasons are positive over the next few weeks, which means that the bias in yields is shifting to the downside. None of this happens in a vacuum, and the outlook for the economy and inflation is volatile.
