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Bond market focus on US elections dashes 2024 rally expectations

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Bond investors are betting rates remain higher longer as November approaches due to a recalculation of the U.S. presidential race.
Interest rates have climbed dramatically since President Joe Biden’s stumble in the first presidential debate last month, which raised concerns about a second Trump victory on Nov. 5. After the argument, the 10-year yield climbed six points to 4.34%.

Some investors expect increased inflation under Trump due to trade and economic policies including higher import tariffs, wasteful government spending, and reduced tax receipts, which would increase fiscal deficits and U.S. debt. Trump’s team claims his pro-growth ideas will lower interest rates and deficits.
Republican National Committee spokeswoman Anna Kelly claimed the market’s response to Trump’s “debate victory reflected the anticipation of the strong-growth, low-inflation reality that President Trump will deliver once again.”

A reckoning on U.S. debt may finally hit the nation and market.
“The lens (is) really starting to turn to fiscal and debt dynamics,” said Pictet Asset Management fixed income CIO Mary-Therese Barton. “(The) rate-cutting cycle is perhaps shallower than expected with a focus more on the longer end.”
As the Federal Reserve prepares to drop rates after an aggressive increasing cycle to curb inflation, worries over expanding budget deficits and mounting government debt threaten to restrict any asset gain.
“We feel the probability of (a) Trump election victory has risen,” stated BNY Americas macro analyst John Velis. “Our faith in lower yields going forward has been eroded and we wouldn’t be surprised to see a continuation of the very recent moves higher in yields.”
If rates are slashed, shorter-term Treasuries may soar, but even bond enthusiasts are wary about longer-term Treasuries. Longer-term debt reflects economic growth, inflation, and budgetary projections.

“The headwind that we’ve been seeing should start abating and we do think investors will start focusing more on the cutting cycle,” said Nuveen CIO and global fixed income head Anders Persson.
But “that’s probably going to show up more on the front end of the curve like the two-year for instance,” said. “The 10-year will be a little bit trickier to call given the elections and if inflation is a little bit stickier.”
Early this year, investors gambled heavily on a normalization of interest rates, but the Fed is now regarded as putting rate cuts out farther. Futures traders betting on Fed rate reduction for the rest of 2024 expect two cuts, one-third of the policy easing investors wanted in January.
When rates fall, bonds rise because they yield more than new ones and are more valuable. As monetary easing has eluded investors, what seemed like a simple trade at the start of the year has become a test of patience.
“I think there was some frustration with some people who took that big positioning,” particularly for clients, said Natixis Investment Managers portfolio consultant Kevin McCullough. “That’s a real hard conversation to have.”
Despite rates falling from their April high, Treasuries’ overall returns since the start of the year remain negative.
As of Friday, the ICE BofA US Treasury Index. recorded negative 0.6% year-to-date total returns, including bond distributions and price variations. Since early February, returns are negative.
Higher rates have made bond yields more appealing, so investors are bullish regardless of the election.
“We still have six months to carry in fixed income… and obviously if yields move lower from here, there’s potential for even more appreciation,” said PIMCO managing director and generalist portfolio manager Mike Cudzil.
After carefully monitored employment statistics showed a worsening U.S. labor market, rates fell Friday.
“Whoever wins the election, regardless if Republican or Democrat, the loser is going to be the deficit,” he stated. “I think what will matter more is the slowing of inflation, the slowing of growth.”

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