The increasing likelihood of Donald Trump winning a second term has helped spark a steep selloff in US government bonds, with investors betting policies including tax cuts could drive up deficits and inflation.
The Wall Street Journal said that treasury yields, which rise when bond prices fall, started surging June 28, a day after a debate between President Biden and former President Donald Trump that the newspaper believe delivered a major blow to Biden’s re-election chances, adding that a poor showing from Biden could also help tip control of Congress to Republicans, creating more space for their budget priorities.
It explained that many investors think that elevated deficits have already played a role in driving up Treasury yields in recent years by increasing the supply of bonds that the market must absorb and putting upward pressure on inflation prompting the Federal Reserve to set interest rates higher than they would have done otherwise.
As the Republican candidate this year, Trump has made broad pr
omises about cutting taxes. He has also said he would impose sweeping tariffs, which analysts say could have an uncertain economic impact, potentially adding to inflation but also raising revenue and slowing economic growth.
On the other hand, some analysts have questioned the assumption that the prospect of a Republican sweep should translate to higher yields.
A Goldman Sachs report said that “the range of potential fiscal deficits under different election outcomes is fairly narrow.” Furthermore, Trump’s plan to raise tariffs could drive yields lower by dragging on economic growth.
Investors also said that Treasurys might have already been primed for a selloff after rallying last month following encouraging inflation data. That rally pushed the yield on the 10-year note 0.5 percentage point below the two-year note a threshold that has also triggered previous rounds of selling.
Treasury yields broadly reflect investors’ expectations for what short-term rates set by the Fed will average over the life of a
bond. But those expectations are more concrete for short-term Treasurys, making them less vulnerable than longer-term bonds to an increase in the supply of bonds or concerns about the longer-term inflation outlook, the Wall Street Journal said.
Longer-term yields also rose faster than short-term yields after Republicans swept control of Congress and the White House in the November 2016 election. This happened again in January 2021, when Democrats’ victories in two elections in Georgia gave them control of the Senate after they had already taken the House and the presidency.
In both cases, investors’ bets on more expansive fiscal policies proved justified. Republicans passed their tax cuts in 2017, while Biden signed a hefty Covid-19 relief package less than two months after his inauguration.
Many investors still expect economic data and signals from the Fed to play the largest role in dictating Treasury yields in the coming months. On the immediate horizon, they will be focused on monthly jobs numbers set
to be reported on Friday and inflation data coming out next week.
Even before last week’s presidential debate, some analysts had started to anticipate larger deficits based on revised spending and revenue projections rather than any new political developments. The Congressional Budget Office last month said it expects the fiscal 2024 deficit to reach $1.9 trillion up from its previous estimate of $1.5 trillion and above last year’s $1.7 trillion.
That led some analysts on Wall Street to predict that the Treasury Department might have to boost the sizes of its note and bond auctions sooner than they had previously expected.
Source: Qatar News Agency