Republican presidential candidate and former US President Donald Trump complained at a campaign rally at Fiserv Forum that his microphone was not working properly. Milwaukee hosted last summer’s Republican National Convention.
Chip Somodevilla | Getty Images
The potential for Donald Trump to win the presidential race has fueled sentiment in financial markets that the firebrand candidate’s policies could spur economic growth and inflation.
If Donald Trump defeats Kamala Harris, some believe rising fiscal deficits and a potential global trade war could mean higher inflation, soaring bond yields and higher stocks.
Since yields and prices move in opposite directions, this is detrimental to the underlying fixed income value. Depending on how things unfold, there’s even talk of a return of “bond vigilantes,” traders who essentially force governments to take action by avoiding government debt or selling it outright.
Investor Ed Yardeni coined the term in the 1980s and warned that vigilantes could be making a comeback. Specifically, he warned traders not to take 10-Year Treasury Bond YieldBond market benchmark interest rates are above 5% – a level not seen since mid-2007.
“We are (yet) calling for 5% on the 10-year Treasury, but bond vigilantes appear to be threatening to hit that target,” Yardeni wrote in comments on Monday.
10-year return rate
What happened to the bonds?
To be sure, there are many reasons why Bond markets have been in turmoil Since mid-September, political considerations for Trump’s re-election have been just one of them. consider:
- Fed Cut short-term benchmark interest rates It fell by half a percentage point on September 18th. Inflation concerns.
- Fiscal year 2024 has just ended and the government is operating Budget deficit exceeds $1.8 trillionincluding more than $1.1 trillion earmarked for financing costs of $36 trillion in U.S. debt.
- Trump and Harris did not even discuss fiscal discipline, raising concerns that investors would demand higher yields in exchange for holding Treasuries that suddenly looked less safe.
In fact, Yardeni believes fiscal and Fed factors are common culprits. The central bank is widely expected to approve a further 25 percentage point rate cut at Thursday’s meeting.
“Investors often hear ‘don’t fight the Fed,’ but maybe the Fed shouldn’t fight the bond vigilantes,” said the head of Yardeni Research. “The bond market can easily offset the impact of another rate cut. This is because the bond market believes that the Fed will cut rates too much, too fast, and thus raises long-term inflation expectations. Concerns about additional factors have heightened these expectations. Next A government’s fiscal excess.
Komal Sri-Kumar, president of Sri-Kumar Global Strategies, added: “Bonds suggest that the continuation of large fiscal deficits under a Kamala Harris or Donald Trump presidency and a lack of discipline in monetary policy will require higher yields “The Fed ignores this signal at its own peril. “
The fiscal generosity of the Harris-led administration, combined with pandemic-related supply and demand factors, has resulted in highest inflation rate For over 40 years.
However, Trump’s proposal has received more attention recently as online betting sites boosted his chances of re-election despite polls showing a close race.
A study finds trouble
one Report from the Peterson Institute for International EconomicsNonpartisan think tanks paint a bleaker picture of the nation’s fiscal and economic health, as well as inflation, during Trump’s presidency.
Author Karen Dynan blames Trump’s stated intentions to raise tariffs and deportations, and Reports suggest he may seek greater powers Exceeding the Federal Reserve will lead to “a decline in U.S. national income, a decline in the employment rate, and an increase in the inflation rate.”
“In some cases, economic conditions recover over time, but in other cases the damage continues into 2040,” the report continued. “Despite Trump’s ‘America First’ rhetoric, these The policies will harm the U.S. economy more than any other country in the world, especially in sectors affected by trade such as manufacturing and agriculture, which in some cases will enjoy stronger economic growth than others.
The institute’s impact on Harris’s presidency has been relatively quiet. one recent work papers It said Democratic policy is likely to retain the baseline forecast as it expects “limited changes to current immigration, trade and Fed independence policies.”
Other voices on Wall Street have also sounded inflationary warnings about Trump’s policies, albeit in a milder tone than Peterson’s comments. 7.4 percentage points higher.
For example, Morgan Stanley recently forecast that tariffs and other isolationist policies under Trump could reduce real economic growth by 1.4% and increase headline inflation by 0.9%.
Likewise, JPMorgan warned that a Republican “red sweep” was the election’s “biggest tail risk.” The bank said it could bring “higher tariffs and mass deportations, triggering stagflation in the United States, including a second spike in inflation.”
However, the company also noted that “Trump has shown a willingness to change his views” and that the aforementioned “tail risks are not priced in by the market or actively discussed among the U.S. customer base.”
Low inflation in Trump’s first term
Indeed, the potential for a tariff-induced surge in inflation was a common theme during Trump’s first term, during which he imposed tough tariffs. Yet 12-month inflation hasn’t even topped 3% in a single month during his presidency — it hit over 9% before falling back during the Biden-Harris administration — while the economy grows ( Except for the severe decline during the outbreak of the new crown epidemic), it remained unchanged and stable throughout.
In fact, some Wall Street analysts believe that the recent surge in yields will be reversed as the Federal Reserve continues to cut interest rates and macroeconomic growth returns to long-term trends in 2025 and beyond.
Evercore ISI thinks inflation is likely to rise under Trump, but expects that to result in the Fed’s benchmark funds rate being just a quarter of a percentage point higher than when Harris was president. Meanwhile, even in the brief coronavirus-related bear market, the stock market performed better under Trump than under Biden and Harris. Some have linked recent stock market gains to rising odds of a Trump victory.
“In our baseline, the risk-off effects of trade policy uncertainty and the risk-off effects of Trump’s animal spirits cancel each other out,” Evercore said in a client note on Monday. The Conference Board monthly sentiment survey October saw a record share of respondents, dating back to 1987, who see share prices rising in the coming year.
Meanwhile, over the past few days, yields have actually declined, albeit slightly, after the Fed’s action. A somewhat counterintuitive surge of one percentage point, or 25 basis points. Some believe the decline may have occurred in the early stages.
“While the impact on the bond market of who wins this election won’t be completely gone by next Wednesday, the impact after the election, regardless of who wins, is likely to be far less than all the uncertainty leading up to the election,” market veteran Jim Paulsen said recently he wrote in his Substack newsletter.
Paulson, who coined the term “yield break” for the recent strange move, said, “This trend is likely to continue as long as economic momentum continues to build. Fortunately, there are some key indicators that suggest that economic momentum is about to slow. , may end the recent strange trend.” Interrupt. “
