by Lawrence Gillum, Chief Fixed Income Strategist, LPL Research
November 06, 2024
As very few expected, the U.S. presidential election did not need extra innings to decide who would become the 47th U.S. President, with Donald Trump winning enough electoral votes to call the race overnight. And while the final make-up of Congress is still unknown (although a red sweep is the expectation as House votes are still being counted), Trump trades are in full effect this morning (check out the most recent Weekly Market Commentary, " Election Stock Market Playbook" for more details on the expected impact on markets with Trump winning the presidential election). For a Treasury market that was already reeling, Trump's victory has put additional pressure on rates, as evidenced by the historic move higher in Treasury yields as the Trump victory became clearer overnight. With the 10-year yield trading around 4.5% and the 30-year trading around 4.6% (as of 8 a.m. ET on November 6), the long end of the Treasury yield curve is fairing the worst.
Treasury Yields Higher After Trump Victory
Source: LPL Research, Bloomberg, 11/06/24
Disclosures: Past performance is no guarantee of future results.
As we wrote about recently, the initial moves higher in yields coming into the election were a combination of better-than-expected economic data (Surprise! Economic Data Has Been Better Than Expected Lately) and the potential for increased debt and deficit spending, regardless of who ultimately won the election (What Scares Us About the Economy and Markets). This morning's move higher in yields is a concern (from the bond market) that Trump’s economic policies could be inflationary. Of the 0.17% increase in the 10-year yield today, roughly half can be attributed to higher inflation expectations. This could potentially complicate the Federal Reserve’s (Fed) ability to cut rates as aggressively as bond markets have priced in.
And we won’t have to wait long for the Fed's response as it kicks off its two-day meeting today where it is highly likely that the Federal Open Market Committee (FOMC) will cut short-term interest rates on Thursday. But market pricing for a December rate cut has come down to roughly a 70% chance of a cut (down from 85% yesterday). And more importantly, the total number of interest rate cuts continues to decline. At one point, markets were expecting 10 total interest rate cuts throughout 2025, which would take the fed funds rate down to 2.9%. Currently, markets are expecting only four more cuts throughout 2025 and a fed funds rate of 3.75%. If markets are right, that likely means long-term Treasury yields could settle into a higher range than what we were expecting and higher bond yields in general. But the good news is that starting yields are highly correlated to future returns, so investors can use the recent back-up in yields to add to high-quality fixed income, especially for those clients with excess cash holdings.
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