Investors were able to notice the bond market’s movements following Donald J Trump’s election win on Wednesday. While stocks rose as investors expressed optimism about Trump’s tax-cutting, deregulation and government spending policies, investors also noticed that there was a noticeable movement in the bond markets.
On Wednesday, the 10-year Treasury yield, which is a benchmark in global finance, reached a peak of 4.48%, before closing its day at 4.425%. This was its highest value since July.
The yield is now 4.3%. This is higher than the 3.6% that it had been before the Fed’s rate cut on September 18. However, the current level of the yield remains lower than the high for this year.
Investors’ concerns over inflation and government spending have fueled this spike in US government bond prices.
Bond market signals fiscal anxiety
It has been long believed that the bond market can predict economic sentiment. The saying “The Bond Market is Smarter Than the Stock Market” captures its power.
Ed Yardeni – the investment strategist and veteran who first coined the term “bond vigilantes”, in the 80s – noted this significant market shift.
The speaker said that Trump’s support is a powerful tool for him globally, but it raises concerns among bond investors who are wary about the fiscal stimulus in an era of large deficits.
The financial markets punish policies that are deemed to be likely to increase inflation or the national debt by raising interest rates.
The increase in borrowing rates could have a ripple effect on Trump’s economic growth, and other markets.
Since weeks yields have been rising, a reflection of expectations that Trump will win the election and inflation could rise.
Yardeni believes that it may reach 5% once again, if Trump’s fiscal policy causes investor concern.
What is the problem with rising yields?
Due to an inverse correlation between yields and bond prices, rising bond yields could be a problem for existing debt holders.
The US Government debt is a very safe asset for institutions such as pension funds, hedge fund managers, and central bankers around the world.
The implications of the increased returns on investment for the global financial system and the borrowing cost are important.
Trump’s fiscal proposals — extending tax cuts that began in 2017, eliminating tips taxes, and stopping taxes on Social Security–would likely increase the federal debt.
According to the nonpartisan Committee for a Responsible Federal Budget, his initiatives could increase the national debt by more than $7.8 trillion in the next decade. This is double what Kamala Harris had projected at $3.5 trillion.
The escalating government debt and the inflation that could be caused by government spending and tax cuts is a difficult scenario for investors. It raises concerns about government debt management.
Trump’s plans for economic growth and the Fed’s rate reductions are uncertain.
In response to Thursday’s economic conditions, the Federal Reserve cut rates by 25 basis points during their recent meeting on monetary policy. This follows a significant 50 basis-point reduction made in September.
Yields on 10-year Treasury bonds settled at 4.35 percent, down from their Wednesday peak of 4.44%. This indicates a slight recalibration in the market.
Analysts suggest, however, that Trump’s agenda, which focuses on deregulation and tax cuts, could lead to faster growth, increasing inflation and complicating any future rate reductions.
Tony Rodriguez, Nuveen’s Head of Fixed Income Strategy, said that the outcome of the elections could prompt the Fed lower rates at a slower pace than originally planned.
He said that the expected cuts for 2025 will now be smaller and farther apart, highlighting the caution of central banks against a rebound in inflation.
Treasury yields were revised as Trump’s intentions became clearer.
Fed Funds Futures indicate that investors expect rates to decline by around 3.7% at the end of this year, a more rapid rate drop than was predicted two months ago.
The strategists at BofA Global Research revised their target near-term for Treasury yields from 3.5% to 4.5%. This is a significant shift from the previous range.
Can higher yields affect stock markets?
When the bond market coughs, equity prices catch a cold.
Stocks become less appealing as an investment because of higher interest rates. Bonds are virtually risk free and offer a return that is comparable to the returns investors get from more risky assets.
The stock market, despite the high yields on Treasury bonds, has so far responded positively. This is due to the lack of uncertainty surrounding the election and the prospects for economic growth.
Investors were anticipating business-friendly policy when the S&P 500 Index hit new highs.
But caution remains. Angelo Kourkafas, senior investment strategist at Edward Jones, warned of the possibility that markets could pull back if yields continued to increase sharply.
He said that when 10-year Treasury rates reached or exceeded 4.5% in the past year, this triggered a pullback of equity markets. This highlights the dangers associated with rising borrowing costs for both consumers and businesses.
How to dispose of your 10 year notes?
Investors who hold older bonds at lower interest rates are faced with a dilemma as the market value of their bond is eroded by higher yields.
Although the temptation is great to sell bonds and invest in those with higher yields, strategic patience may be more beneficial.
JB Golden of Advisors Asset Management advises in a Barron’s article to wait until the markets stabilize.
He suggested that there could be “some really nice opportunities” if the yields of 7-10-year bonds rise to between 4% and 5%.
He is cautious, however, about investing in longer-term projects until he has more clarity regarding the trajectory of the federal deficit.
Questions about fiscal responsibility are being raised in the wake of Trump’s extravagant spending plans.
John Paulson, Scott Bessent and other economic giants have expressed their concern.
The two candidates for the position of Treasury Secretary have both openly criticized excessive government expenditure.
Analysts are in agreement that Treasury leadership’s choice will have a major impact on the direction of the economy and how the market responds to fiscal policy.
The bond vigilantes have returned, reminding us that bullish policy can be a powerful force in the market, but it comes at a high price, as is readily acknowledged by the bond markets.
Post This The bond markets verdict was on Trump’s victory. Now what do you do with those notes? This page may change as new updates are released
