The $28 trillion U.S. Treasury market is perhaps the world’s most fundamental financial market. This is where the U.S. government auctions off its bonds to investors who buy and trade them, influencing borrowing costs around the world.
It has also become one of the main places for investors to voice their opinions on the White House race.
Vice President Kamala Harris and former President Donald J. Trump have each promised tax and spending policies that will likely increase the federal deficit and lead to increased government borrowing.
But investors are focused on Mr. Trump’s proposals, which include hefty tariffs and mega-tax cuts, especially as the odds of his victory increase in some gambling markets.
His policies have led economists to raise their estimates of government debt. For example, one bipartisan group predicts that Trump’s platform will lead to an additional $7.5 trillion in U.S. debt issuance over 10 years, more than double the estimate for Harris’ policy. .
David Cervantes, founder of asset management firm Pinebrook Capital, said: “If Trump wins, you’re shorting bonds and leveraging stocks, betting that bonds will fall in value and yields will rise further.” “up,” he said. He believes in what has come to be known in financial circles as the “Trump trade.” The bet is that if Mr. Trump takes power, it might not only raise inflation and interest rates, but also boost corporate profits in the short term.
The yield on the 10-year U.S. Treasury, which is the benchmark interest rate for government borrowing and influences how households and businesses borrow, has risen 0.6 percentage points since mid-September and is rising rapidly. And as reflected in bets on betting site Polymarket, Trump’s chances of victory rose over the same period, eventually returning to levels seen before Harris emerged as the Democratic nominee. It’s coming.
“There’s clearly a close relationship between the two,” said Andrew Brenner, head of international fixed income at National Alliance Securities.
However, betting markets do not predict outcomes. And other influences on interest rates: growth expectations, the latest inflation numbers, the inflation outlook, market expectations about Federal Reserve policy, policy forecasts that rely on Fed officials’ own data, and It is difficult to disentangle this explanation of changes in Treasury yields from other influences. more.
Yields fell in the summer when unemployment was rising. Recession fears tend to correlate with lower yields. But based on recent employment data, that trend appears to have reversed. Warren Paiz, co-founder of ThreeFourteen Research, is among those who believe this reversal is primarily responsible for the rise in yields.
The recent rise in long-term Treasury yields comes as the Federal Reserve begins lowering short-term interest rates. Additionally, the Fed’s decision to cut interest rates while the economy was still growing has led some investors to believe that the tailwind from lower interest rates could reignite inflation and necessitate higher rates in the future. There is also growing concern that there is.
Those concerns could be exacerbated if Trump’s Republicans control both the White House and Congress, clearing the way for his stimulus plan to be introduced with less legislative resistance.
Along with a series of ambitious tax cuts, Mr. Trump has repeatedly affirmed his pledge to significantly increase tariffs. Many predict these import tax increases, combined with a widening budget deficit, will reignite the inflation that the Fed only recently seemed to have contained.
“Tariffs are likely to increase inflationary pressures,” said Mark Dowding, chief investment officer at RBC Global Asset Management. “This could make it more difficult for the Federal Reserve to cut rates next year if President Trump prevails.”
Changes in the market could raise borrowing costs for households and businesses.
The U.S. government’s benchmark interest rate could also rise if investors demand higher yields from issuing more bonds in a high-inflation environment.
However, even given the increasing supply of government bonds, some bond managers view debt levels as a secondary rather than a primary consideration.
“We see supply as a passenger, not a driver, of Treasury yields,” said Leslie Falconio, head of taxable fixed income strategy at UBS Global Wealth Management, regarding the prospect of more government debt issuance. “The main drivers are growth and inflation, not supply.”
If inflation expectations, which influence the behavior of major bond investors, can be maintained, even with higher tariffs and budget deficits, then the large increase in debt expected in the second half of 2025 will be less of a problem than feared. Maybe.
And even as short-term and long-term government debt growth expectations have soared, “inflation expectations are low” right now, said David Kotok, chief investment officer at Cumberland Advisors. He said the expected inflation-adjusted returns from buying government bonds in the form of government bonds remain “positive and attractive.”
Other shocks, such as a trade war that could be triggered by tariffs or geopolitical turmoil that sends oil prices higher, are on the list of concerns for him and other investors. Still, Kotoku’s view is that “there is no shock, and there is no problem with absorbing debt.”
For many fund managers, higher yields become too attractive to pass up at some point, especially since U.S. Treasuries, which pay corporate bondholders in U.S. dollars, are widely considered the safest assets in the world.
Jim Caron, a leading portfolio manager at Morgan Stanley, said he bought U.S. Treasuries the last time Wall Street was preoccupied with inflation and inflation, when yields plummeted to about 5% in the fall of 2023. He was one of many investment managers who jumped on board. An increase in the supply of debt.
This buying pushed up the price of U.S. Treasuries and pushed down yields.
Currie Cox, chief market strategist at Ritholtz Wealth Management, argues that the current yield on U.S. Treasuries offered to investors, at just over 4%, remains a “gift from the market gods.” –Especially when compared to the low interest rates of the 2010s.
But these rate increases could put small businesses looking for cheaper loans and aspiring homebuyers looking for lower mortgage rates into an “awkward bind”, it said. he said.
Caron believes that whether or not Trump has a second term, post-election and 2025 will be “conditional on how supply impacts the market.”
“If the economy is slowing down and people are afraid of a recession, then supply is not as important,” he said. “If the economy is growing, people think inflation will eventually rise, so supply becomes more important.”
