Yields — The Bump from Trump

According to pre-election polls, many believed the results would be too close to call.  Instead, it resulted in a clear mandate.

The graph below shows the Trump presidential betting pool odds aligned with the ten-year US Treasury bond yield. This data goes back to July of this year. As you can see, ten-year bond yields were elevated after the Trump-Biden debate, and Trumps’ betting odds were high along with bond yields. These coupled trends assumed possible undivided government to go with a Trump presidency, suggesting that investors would be confronting higher deficits and higher inflation — similar to what happened after the surprise Trump victory in 2016.

After Kamala Harris replaced President Biden on top of the Democratic ticket, the gap in the polls began to close.  That trend is reflected by lower Trump odds in the betting pools and a corresponding drop in ten-year US Treasury yields (aided by some softer economic data). 

Since the Federal Reserve cut shorter-term interest rates on September 18^th of this year, we have seen a resumption of higher US ten-year yields — also accompanied by the resumption in upward betting odds for a Trump presidency. It should be noted that increases in longer-term bond yields after the start of a Fed cutting cycle are almost unheard of. Though there were some somewhat stronger economic numbers (e.g., a stronger jobs number for September), I think most of the rise was correlated with perceived election outcomes. 

As I write this the Friday after the election, we are still waiting for the makeup of Congress. The Senate will be a Republican majority, and we will not know the makeup of the House of Representatives yet. However, bond yields started to respond over last weekend. There was a poll showing Harris leading in Iowa. That surprised the market as Trump had been leading in other polls (and ultimately won the state and its six electoral votes with 56% of the vote). But that poll caused a dip in the ten-year yield, as you can see from the graph tracking the ten-year bond yield intraday from last Friday.

Looking at this graph of the intraday 10-year Treasury yield, we see the dip on Friday morning after the weaker than expected jobs number. By later Friday afternoon, the yields had shot up — presumably more politically driven. On Monday, the ten-year took a dip in yield on the Iowa poll story; but the upward rise in yields resumed on Tuesday and picked up steam overnight as the magnitude of the Trump victory came into focus. After the election lift, the ten-year has returned to 4.32%, the beginning of reversion to the mean is at work.

Where are we now? 

The next chart below shows where Treasury yields, AAA municipal yields, and AA corporate yields were on September 18^th when the Fed cut short-term interest rates and where we are now on November 7^th. As you can see, the rise in yields in Treasuries is higher than that of munis or corporates. For munis the reason is twofold. First, because of the tax exemption, municipals usually rise in yields less than Treasuries do (though that is not always true). This year, many issuers moved up their issuance into September and early October to beat election volatility (correct move, as it turned out). With corporates, spreads have been tightening over the past year, and that has kept their rise in yields more muted.

Source: Bloomberg

The next graph shows the ten-year bond yield from June 27^th. That was the day of the Biden-Trump debate. The ten-year yield quickly rose as assumptions of a Republican sweep took hold. The reversal when Harris entered the race took that yield all the way to 3.65%, and we are now at 4.30 after peaking near 4.48% intraday on November 6, the day after the election. Our point is that yields are back to where they were in early July, or lower, with assumptions of a Republican sweep. Now we are there (or almost there, awaiting final House results). I would suggest the market has already done most of the Trump lift in rates. 

Going back to 2016, we can see the rise in yields after the SURPRISE Trump election on November 8, 2016. Yields rose from 1.60% to 2.20% very rapidly and then began a period of consolidation. I believe that yields should consolidate again this year from the rise since September 18^th, when the Fed cut rates. The bond market should go back to looking at economic data; and any more Trump rate lift should be moderate.

John R. Mousseau, CFA
Chief Executive Officer & Director of Fixed Income
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