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Home Stock Analysis Analysis: Bond market’s renewed focus on U.S. elections dampens 2024 bullish hopes Reuters

Analysis: Bond market’s renewed focus on U.S. elections dampens 2024 bullish hopes Reuters

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Davide Barbucia

NEW YORK (Reuters) – A recalibration over the outcome of the U.S. presidential election has bond investors betting yields will stay elevated for an extended period as November approaches.

Yields surged after President Joe Biden stumbled against Republican rival Donald Trump in the first presidential debate last month, raising speculation that Trump would win again in the vote on Nov. 5. The yield on the benchmark 10-year Treasury note rose about 6 percentage points to 4.34% after the debate.

Some investors expect inflation to rise under a Trump administration because trade and economic policies such as higher tariffs on imports and wasteful government spending as tax revenue falls threaten to widen the budget deficit and US debt levels. Trump’s team says his pro-growth policies will lower interest rates and reduce the deficit.

Republican National Committee spokeswoman Anna Kelly said in a statement that the market’s “reaction to Trump’s debate victory reflects expectations of the high growth, low inflation reality that President Trump will once again deliver.”

Some say the U.S. settlement on its debt will eventually catch up with the country and its markets.

“The focus is starting to turn to fiscal and debt dynamics,” said Mary Therese Barton, chief investment officer for fixed income at Pictet Asset Management. “The rate-cutting cycle has been shallower than expected and the focus is on the longer term.”

Concerns over widening budget deficits and the government’s rising debt burden threaten to curb an initial rally in bonds that is expected as the Federal Reserve moves closer to cutting interest rates after an aggressive cycle of hikes aimed at taming inflation.

“We feel a Trump election victory has become more likely,” John Velis, Americas macro strategist at BNY, wrote in a note. “Our confidence that yields will move lower going forward has been eroded and we would not be surprised to see a continuation of the very recent move higher in yields.”

Shorter-term Treasuries, which are more directly tied to changes in monetary policy, could still rise if rates are cut, but even for bond bulls, the outlook is cloudier for longer-term Treasuries, which tend to reflect expectations for economic growth, inflation and the fiscal outlook.

“The headwinds we’ve seen so far should start to subside and investors will start to focus more on the rate-cutting cycle,” said Anders Persson, chief investment officer and head of global fixed income at Nuveen.

But “it’s probably going to be more pronounced in the front half of the curve, like the two-year Treasury,” he said. “The 10-year Treasury is going to be a little bit harder to forecast if you think about the election and inflation getting a little stronger.”


Investors bet big on a normalization of interest rates earlier this year, but that has changed dramatically as investors increasingly expect the Fed to delay further rate cuts. Futures traders tracking the Fed’s policy rate are betting on roughly two rate cuts for the rest of 2024, a third of the policy easing investors were hoping for in January.

When rates fall, bonds rise because existing debt commands a higher yield than new debt, making it more valuable. But with monetary easing elusive, what seemed like a simple trade at the start of the year is turning into a test of investor patience.

“I think there was some frustration, especially with some of the people who had taken big positions on behalf of their clients,” said Kevin McCullough, a portfolio consultant at Natixis Investment Managers. “This is a really difficult conversation.”

Treasury total returns year to date remain in negative territory, even as yields have fallen from their yearly highs in April.

The year-to-date total return of bonds, which includes dividends and price changes, was minus 0.6% as of Friday, according to the ICE BofA U.S. Treasury Index. Returns have been negative since early February.

Regardless of the election outcome, many investors remain optimistic about bonds as yields become more attractive in a rising interest rate environment.

“There’s still six months left in the bond holding period, and if yields fall further from here, there’s potential for further gains,” said Mike Casil, managing director and generalist portfolio manager at PIMCO, one of the world’s largest bond investment firms.

Yields fell on Friday after a closely watched jobs report was seen as pointing to a weakening U.S. labor market.

“No matter who wins the election, Republican or Democrat, the loser is the deficit,” Kazil said. “I think what’s more important is slower inflation, slower growth.”

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