As the U.S. election looms, bond traders are hitting the brakes on their strategies. After weeks of rising Treasury yields, the uncertainty surrounding the presidential race is prompting caution. Traders are taking a step back, reducing their exposure and preparing for a week that could reshape the financial landscape.
A Shift in Strategy
In recent days, we’ve seen a clear trend: traders are liquidating Treasury futures positions. A recent JPMorgan Chase & Co. survey indicates that many clients are trimming both long and short bets. This cautious approach is telling; confidence in future bond movements has diminished significantly.
- Why the Hesitation? The outcome of the election could significantly influence everything from interest rates to government spending, making traders hesitant to make bold moves. As Angelo Manolatos, a rate strategist at Wells Fargo Securities, puts it: “There’s lower conviction in terms of the outcome,” which translates to less risk-taking in the market.
The Federal Reserve and Interest Rates
Traders are almost certain the Federal Reserve will cut interest rates by a quarter-point on Thursday. But beyond this anticipated move, the outlook for 2025 heavily depends on the election results.
- Key Takeaway: The election could determine the Fed’s stance for years, impacting everything from taxes to tariffs.
What’s at Stake? The Scenarios Ahead
As we look ahead, several potential outcomes from the election present varying implications for bond markets:
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GOP Sweep:
- If Republicans sweep the election, bondholders could face challenges.
- Expectations: A GOP-controlled Congress alongside a potential Trump return could lead to tax cuts and increased tariffs, likely widening the federal deficit and reigniting inflation.
- Market Reaction: Anticipation of these outcomes has already pushed 10-year yields to a four-month high of nearly 4.4%.
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Divided Congress:
- A Harris victory with a Republican-controlled Congress could lead to a bond market rally.
- Rationale: This scenario would reduce the risks of new tariffs and significant deficit expansion. Some analysts even project a fiscal cliff could bring 10-year yields down by as much as a quarter-point.
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Trump with Divided Congress:
- Analysts are split here. Some predict yields will fall due to less fiscal stimulus, while others warn that tariffs could still pressure the bond market, especially short-term rates.
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Democratic Sweep:
- A complete Democratic victory could mean more government spending, which might push yields higher.
- Contrasting Views: While some strategists foresee an environment unfriendly to corporate interests and risk appetite, others believe it could be bullish for bonds due to potential corporate tax hikes.
Navigating Uncertainty
The bond market is navigating an incredibly complex landscape. Matthew Raskin from Deutsche Bank Securities emphasises the difficulty in predicting market reactions: “Even when we know what policies are going to be enacted, we have a fair degree of uncertainty about their implications.”
- Investor Mindset: With high volatility expected, many investors are hesitant to make significant moves until clearer outcomes emerge.
Preparing for Volatile Times
As the election date approaches, bond traders are preparing for a potentially turbulent period. The ICE BofA Move Index, which measures bond market volatility, is at its highest in a year, signalling that traders are bracing for swings in response to the election.
- Key Insight: “I would not want to take positions on duration at this point,” says Vishwanath Tirupattur, chief fixed-income strategist at Morgan Stanley. The key takeaway here is that the difference between campaign promises and actual policy implementation is vast.
What to Watch This Week
As we head into this crucial week, several economic data points and events are on the radar:
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Economic Data:
- Nov. 4: Factory orders, durable goods, capital goods orders
- Nov. 5: Trade balance, ISM services index
- Nov. 6: MBA mortgage applications, S&P Global US services PMI
- Nov. 7: Nonfarm productivity, unit labour costs, jobless claims, wholesale trade sales, consumer credit
- Nov. 8: University of Michigan sentiment
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Fed Calendar:
- Nov. 7: FOMC rate decision
- Nov. 8: Statements from key Fed officials
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Auction Calendar:
- Nov. 4: 13- and 26-week bills, three-year notes
- Nov. 5: 42-day CMB, 10-year notes
- Nov. 6: 17-week bills, 30-year bonds
- Nov. 7: 4- and 8-week bills
Conclusion
With the U.S. election on the horizon, bond traders are pulling back their bets amid uncertainty. The potential outcomes could reshape not just interest rates but the broader financial landscape for years to come. As we brace for what’s next, it’s clear that we’re in for a turbulent ride.
