US Bond Yields Surge as Trump Win Stokes Inflation Expectations
(Bloomberg) -- Treasury yields surged as investors piled back into bets that Donald Trump’s return to the White House will boost inflation.
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The US government bond selloff was among the worst of the past five years, lifting yields across maturities by nine to 17 basis points as traders slashed wagers on the scope of interest-rate cuts by the Federal Reserve over the next year. They still expect the central bank to cut rates by a quarter point on Thursday.
Treasury yields peaked before midday in New York, with the 30-year bond’s rising as much as 24 basis points to 4.68%. The market stabilized, and yields retreated from their highs, after an auction of 30-year Treasury debt at 1 p.m. New York time drew strong demand. Still, the moves were vindication for those who doubled down on the so-called Trump Trade — higher yields and a steeper curve.
“The bond market anticipates stronger growth and possibly higher inflation,” said Stephen Dover, head of the Franklin Templeton Institute. “That combination could slow or even halt anticipated Fed rate cuts.”
As investors amp up on bets that policies such as tax cuts and tariffs will fuel price pressures, the yield on 10-year Treasuries surged as much as 21 basis points to 4.48%, the highest level since July, aided by a large block trade in futures. European bonds fared better, reflecting concern about the impact of US tariff on the euro area’s export-reliant industries.
Bets on a resurgence in US inflation were shown by the two-year inflation swap rate surging 20 basis points to 2.62%, the highest since April. The price action has parallels to the aftermath of the 2016 election, when Trump’s victory sent inflation expectations surging and bonds sliding.
The “move higher in yields is a concern from the bond market that Trump’s economic policies could be inflationary,” said Lawrence Gillum, the chief fixed-income strategist at LPL Financial. “This could potentially complicate the Fed’s ability to cut rates as aggressively as bond markets have priced in.”
Freya Beamish, head of macroeconomics at TS Lombard, said the biggest topic on her clients’ minds is whether the selloff in bonds is just “a taste of things to come.”
“The question of whether Trump’s policies are capable of generating persistently higher inflation is one which we can debate for the next five years,” said Beamish. “In short, markets cannot fully price that story in today.”
The moves also signal worries that Trump’s proposals will fuel the budget deficit and spur higher bond supply.
Wednesday’s $25 billion auction of 30-year bonds — the last of three fixed-rate Treasury sales this week — drew 4.608%, the highest result since May. However the yield was more than two basis points lower than indicated by pre-auction trading, showing that buyers were willing to accept a lower interest rate than the market’s assessment of fair value. By contrast, buyers of 10-year notes that were sold on Tuesday incurred losses as the yield climbed from the 4.347% auction level.
JPMorgan Chase & Co. Wednesday changed its forecast for interest rates because, economist Michael Feroli wrote, “policy uncertainties may lead the Fed to move more slowly than it otherwise would.” While the bank still expects quarter-point rate cuts on Nov. 7 and Dec. 18, the new forecast is for quarterly cuts from March 2025, ending at 3.5%. Previously it expected a cut at each meeting, ending at 3%.
Increases in 2022 and 2023 to arrest a surge in inflation brought the central bank’s target band for the main US overnight interest rate to 5.25%-5.5%. It was lowered by a half point on Sept. 18, and policymakers indicated two more quarter-point cuts were likely by year-end. However Treasury yields have risen since then, fueled in part by US economic data outperforming expectations.
Positions Adjusted
For many investors digesting the election results, the frustration will be that they eased off at the last moment after weekend polls showed US Vice President Kamala Harris gaining ground — prompting a late surge in appetite for hedges. Tuesday’s price action in Treasury futures was dominated by liquidation, with open interest dropping across most tenors as yields declined led by the long end.
There was a frenzy of trading as investors adjusted positions.
“There was tremendous volume for overnight trading,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group, who was up through the night trading. “It wasn’t like these moves were done with no volume.”
Still, some investors already see the move higher in US yields as overdone. Control of the House of Representatives remained too close to call, with the potential for a divided Congress curtailing a Trump administration’s ability to pursue its fiscal policies.
Flows in Treasury futures and options Wednesday included ones consistent with profit-taking on bearish wagers.
“We think Treasury yields are near a peak,” Michael Schumacher and Angelo Manolatos, interest-rate strategists at Wells Fargo & Co., said in a report. Those “who had been contemplating adding duration but wanted to wait for the election results should get ready to act.”
--With assistance from Edward Bolingbroke and Justina Lee.
(Adds 30-year auction result in third and 10th paragraphs and updates yield levels.)
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