Treasuries Face Risk of Trump Sweep ‘Disaster,’ Clocktower Says

(Bloomberg) -- Ten-year Treasury yields are at risk of approaching 5% ahead of the US election, if the odds of a Donald Trump-led Republican victory continue to rise, according to Clocktower Group.

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If expectations build for a definitive Trump victory, “bonds will start pricing in higher level of fiscal profligacy,” Marko Papic, chief strategist at the asset manager, wrote in a note. “What happens if bond yields go up while the economy is slowing down? A potential market carnage.”

Papic’s thesis is that Republicans in Congress are always fiscally profligate when a Republican sits in the White House. He pointed to Trump’s 2017 Tax Cuts and Jobs Act as an example of such during his presidency.

Current consensus points to around a 25% chance of a Trump sweep, while Clocktower pegs the odds closer to 50%. That difference translates to around 4.8% to 5% for benchmark Treasury yields, compared with 4.5% for the consensus call, he wrote in a note.

The firm upgraded its predictions of a Trump win to 60% from “too close to call” in September and warned that the outcome could rip across everything from the dollar and emerging markets. Papic sees Trump’s election as an “epic disaster” for bonds and that yields had risen close to 50 basis points in the first two weeks following his 2016 victory.

The stakes are higher for bonds in this election as US 10-year yields are more than 250 basis points higher than where they were in November 2016, when Trump was elected. Moreover, fears of higher-for-longer US rates are keeping yields elevated at around 4.5%, boosting risks of increased volatility.

Should some latent risk of a populist sweep hover over bond markets, “the real economy will face a noxious brew of slowing growth and accelerating borrowing costs,” Papic, who also authored Geopolitical Alpha: An Investment Framework for Predicting the Future, wrote.

“Such a squeeze could pick up momentum of its own, further choking off growth over the next six months.”

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