Bond Market Sees ‘Trump Trades’ Stalling
Investors are focused primarily on the Fed, currently pricing in at least two quarter-point interest rate cuts before the end of the year.
Bond traders are reassessing so-called “Trump trades” as Vice President Kamala Harris gathers support among Democrats, weighing the political shakeup against upcoming fresh economic data and the path of U.S. interest rates ahead.
Yields across maturities rose by 3 to 5 basis points (bps) as volumes picked up in midday Monday trading in New York. The moves set the stage for a series of auctions this week, as well as a report on the U.S. economy’s growth and an update on the Federal Reserve’s favored gauge of inflation.
“Investors’ focus should be back on fundamentals and Fed policy,” said George Catrambone, head of fixed income, DWS Americas. While markets will fluctuate on political news, “trading around elections is oftentimes the fool’s errand,” he said.
Trading in the U.S. Treasury market late last week indicated that investors had already started to prepare for President Joe Biden’s decision to drop his bid for re-election. That preparation materialized as a slightly flatter U.S. yield curve, marking a loss of momentum behind wagers on higher bond yields dubbed one of the so-called Trump trades, which are bets seen benefiting from Donald Trump’s advocacy of looser fiscal policy, higher trade tariffs, and weaker regulation.
With about three months of campaigning ahead, Biden’s exit from the race is seen by some traders as potentially creating a closer contest. Harris has quickly consolidated support from powerful Democrats for her nascent presidential bid and appears to have a clear path to the nomination.
But for all the market volatility generated by the election, the main driver of yields remains conjecture over how much the economy is slowing—and to what degree that compels the Fed to begin its easing cycle.
“The election does matter in some corners of the market, such as in currencies, but Treasuries are going to be driven largely now by U.S. economic data and the Fed at this point,” said Scott Buchta, head of fixed-income strategy at Brean Capital.
Investors are pricing in at least two quarter-point interest rate cuts before the end of 2024, starting in September. Policymakers are expected to keep their key rates unchanged for an eighth-straight meeting next week, marking a year since they first reached the current target range of 5.25 percent to 5.5 percent. Ahead of the July 31 announcement, Fed officials are observing a communication blackout.
The expectation of rate cuts arriving by September has boosted policy-sensitive Treasuries and narrowed the gap between longer-dated Treasuries for much of July.
Less than a week ago, the two-year yield was around 20 bps above the 10-year, the narrowest level since early January. In early trading Monday, the two-year was briefly trading 30 bps over the 10-year benchmark, well within this month’s range.
Awaiting traders are key economic releases later this week, with a read on second-quarter GDP on Thursday. That will be followed Friday with an update on the Fed’s preferred underlying inflation measure, the personal consumption expenditures (PCE) price index. Following a surprise easing in June consumer prices earlier this month, led by services, the latest core PCE read is seen retreating to an annual pace of 2.5 percent, from 2.6 percent in the year to May.
Those figures will come ahead of policymakers’ July gathering, which investors will monitor closely for any clues on the Fed’s timing of rate cuts.
“It would appear we’re getting more clarity on monetary policy rather than potential fiscal policy,” said Kevin Flanagan, head of fixed income strategy at Wisdomtree. To him, Fed officials outlining their policy statement next week is crucial. “From the political standpoint, there’s just so many unknowns,” he said.
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