Bonds fall the most since 2020 as Trump’s win reignites inflation risk – Orange County Register

Greg Ritchie | Bloomberg

US Treasury yields rose, with the most rise in 30 years since the global flight to cash in March 2020, as investors again bet that Donald Trump’s return to the White House will boost inflation.

The longest-maturity U.S. Treasury yield rose as much as 24 basis points to 4.68%, its highest level since May, and remained higher by about 20 basis points. All tenor rates rose at least 13 basis points at one stage as traders cut bets on the extent of the Federal Reserve’s interest rate cut next year. They still expect the central bank to cut rates by a quarter point on Thursday.

The 30-year Treasury auction at 1:00 p.m. New York time is adding pressure to that segment of the market. Still, the yield trajectory provides vindication for those who doubled down as part of the so-called Trump deal – higher yields and a steeper curve.

“The bond market is expecting stronger growth and possibly higher inflation,” said Stephen Dover, head of the Franklin Templeton Institute. “This combination could slow or even stop the Fed’s expected rate cuts.”

As investors bet that policies such as tax and tariff cuts will contribute to price pressure, the 10-year Treasury yield rose 21 basis points to 4.48%, its highest level since July, helped by large block trading futures. They underperformed European bonds, reflecting concerns about the impact of US tariffs on the eurozone’s export-dependent industries.

Bets on a rebound in US inflation were bolstered by a 20 basis point rise in the two-year inflation swap rate to 2.62%, the highest level since April. The price action has parallels with the aftermath of the 2016 election, when Trump’s victory sent inflation expectations soaring and bonds falling.

Freya Beamish, head of macroeconomics at TS Lombard, said the biggest topic on her clients’ minds is whether the bond sell-off is simply a “test of things to come”.

“The question of whether Trump’s policies are capable of generating sustained higher inflation is a question we can debate over the next five years,” Beamish said. “In short, markets cannot fully appreciate this story today.”

The moves also signal concerns that Trump’s proposals will widen the budget deficit and spur more bond supply.

Wednesday’s $25 billion 30-year bond auction will be the last of three sales of U.S. fixed-rate debt this week. Buyers of 10-year notes sold on Tuesday face mounting losses as yields rise from auction levels of 4.347%.

JPMorgan Chase & Co. on Wednesday changed its interest rate outlook because, as economist Michael Feroli wrote, “political uncertainty could cause the Fed to move more slowly than it would otherwise.” While the bank still expects quarter-point rate cuts on November 7 and December 18, the new forecast calls for quarterly cuts from March 2025.

The hikes in 2022 and 2023 to stem a surge in inflation put the central bank’s target range for the main U.S. overnight interest rate at 5.25%-5.5%. It was cut by half a point on September 18, and policymakers have indicated that two more quarter-point cuts are likely by the end of the year. However, Treasury yields have since risen, thanks in part to U.S. economic data beating expectations.

Positions have been adjusted

Many investors digesting the election results will be disappointed that they weakened at the last minute after polls over the weekend showed US Vice President Kamala Harris gaining ground, sparking a late surge in hedging appetite. Treasury futures price action on Tuesday was dominated by liquidation, with open interest lower across most maturities as yields fell primarily on the long end.

Trading was frantic as investors adjusted positions.

“The overnight trading volume was huge,” said Tony Farren, managing director of betting sales and trading at Mischler Financial Group, who was awake during the overnight trading. “It wasn’t like these movements were done without volume.”

However, some investors already believe the rise in US bond yields is excessive. Control of the House of Representatives remained too close to call, with the possibility of a split in Congress limiting the Trump administration’s ability to implement its fiscal policies.

Treasury futures and options flows on Wednesday included profit-taking in bearish rates.

“The bond selloff has gone too far, so expect the Fed to continue on its path to lowering rates,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The market appears to be taking the potential inflationary impact of Trump’s policy agenda seriously, although there is still significant uncertainty about the extent of its implementation or its actual impact on inflation.”

—With assistance from Liz Capo McCormick and Edward Bolingbroke.

Originally published: November 6, 2024 9:59 am PT