Topline
Government bond yields touched their highest levels since mid-summer Tuesday as the bond market furthered its surprising move after the Federal Reserve’s rate cut last month – and the November election may put further pressure on bonds.
Donald Trump, left, and Federal Reserve Chairman Jerome Powell in 2017.
Key Facts
Yields for the benchmark 10-year U.S. Treasury note rose above 4.2% for the first time since July 26 in morning trading, while the 2-year government bond yield hit its highest level since Aug. 20 at 4.06%, according to CNBC data.
That caps a borderline stunning rise in bond yields after the Fed slashed its target federal funds rate by 0.5 percentage points Sept. 18, as Treasuries serve as a proxy for the market’s expectations for monetary policy, meaning investors now anticipate higher interest rates in coming years than they did before the Fed dramatically lowered rates.
Yields for the 2-year note are up from about 3.65% just before the Fed cut and yields for the 10-year are up from about 3.6%.
Higher bond yields mean lower existing bond values as investors demand a higher annual payout to hold government debt, and higher government bond yields work their way through the broader economy as they serve as the baseline for many loan types, including corporate borrowing – see this week’s stock market selloff tied to higher yields – and consumer borrowing like mortgages, which climbed a 2-month high last week.
What To Watch For
There’s reason to believe the election may provide further upward pressure on Treasuries, as the results could determine whether federal borrowing surges. JPMorgan Chase strategists forecast higher 10-year yields in the wake of three of the four federal election scenarios: a win for former President Donald Trump accompanied by split chambers of Congress, a Trump victory with a Republican House and Senate, a win for Vice President Kamala Harris with split Congress and a Harris victory with a Democratic House and Senate. JPMorgan estimates a Harris win with a split legislative branch would have no impact on the 10-year yield, a Trump win with a divided Congress would send it up 10 basis points, a Democratic sweep would lead to a 20 basis-point rise and a Republican sweep would cause a 40 basis point bump, sending the 10-year to about 4.6%, a level not seen since May and higher than it ever sat between 2008 and 2022.
Crucial Quote
A Democratic or Republican sweep next month “will result in fiscal expansion relative to the baseline of divided government” and “fiscal concerns…would likely come back to the forefront” for investors,” JPMorgan strategists Jay Barry and Srini Ramaswamy wrote in a recent note to clients. As for why the steeper bond market reaction under a GOP sweep, the strategists referred to research from the nonpartisan Committee for a Responsible Federal Budget which found Trump’s economic proposals would push up the U.S. national debt by $7.5 trillion compared to $3.5 trillion for Harris’ policies, a difference largely tied to the tax cuts floated by Trump.
Tangent
Analysis from UBS investment bank published earlier this month predicted a sweep in either direction would be worse for U.S. stocks than a divided federal government, while a scenario in which Trump is able to enact his proposed massive tariffs levying a 60% tax on Chinese imported goods and 10% tax on other imports is a much worse outcome for equity prices.
Key Background
The U.S. national debt stands at $35.8 trillion, according to the Treasury Department, up from $19.6 trillion at the end of the 2016 fiscal year before Trump took office and from $27 billion at the end of the 2020 fiscal year before Joe Biden’s presidency. Treasury notes serve as a tool for the U.S. to fund government programs, and the sustained increase in yields reflects growing investor angst about the long-term effects of the growing national debt. So, these pseudo loans provided by investors to the government grow more expensive as the government accumulates more debt, just as how a debt-straddled company or consumer would likely have higher borrowing costs. A far less worrisome factor has also driven up yields in recent weeks, as the bond market weakness is partially a reflection of increased flows into the stock market as Wall Street shakes off recession fears and expresses confidence in the U.S. economy.