"Trump Trade" Barometer: US Treasury Yield Curve!

In the past, the yield curve used to predict the economic recession in the United States has become a new indicator for the U.S. presidential election.

Recently, Wall Street has discovered that when Trump is leading, the U.S. bond yield curve will become steeper.

According to previous experience, the 2-year and 10-year U.S. bond yield curves can be used as reference indicators for predicting economic recessions. However, since the U.S. presidential debate at the end of June, the yield curve has gained a new function: as a barometer for the U.S. presidential election. Some market participants have jokingly referred to this as the "Trump trade".

In simple terms: once Trump takes the lead in the election, long-term interest rates will rise; once Trump is at a disadvantage, long-term interest rates will fall.

For example, after U.S. President Biden lost to Trump in the debate at the end of June, the 10-year U.S. bond yield continued to soar, approaching the 4.5% mark.

When Biden refused to drop out of the race in early July, the 10-year U.S. bond yield began to fall. After the cooling of U.S. inflation data last Thursday, the 10-year U.S. bond yield even dropped to 4.18% at one point, currently trading around 4.24%. At the same time, the 2-year U.S. bond yield is also falling, dropping 13 basis points last Thursday to about 4.5%.

Why does this "Trump trade" occur?

Some analysts pointed out that Biden's poor performance in the debate at the end of June increased expectations of Trump's victory and intensified investors' concerns about rising inflation, as Trump is more inclined to impose import tariffs and claims to expel millions of immigrants, which may exacerbate inflation and bring upward pressure on long-term interest rates. The cooling of inflation and the labor market last week significantly raised market expectations for a Fed rate cut.

Jim Robinson, CEO of Robinson Capital Management, expects that regardless of who takes office, short-term interest rates will slow slightly, as the Fed may cut rates as early as September.

At the same time, preparations need to be made for the steepening yield curve. If Trump wins and continues to impose tariffs and mass deportations of immigrants, stagflation will occur. In this scenario, jobs become increasingly difficult to find, while inflation persists, leading to a rise in long-term interest rates.

Another reason for the "Trump trade" is that if Trump takes office, he will tend to implement short-term economic stimulus through tax cuts and increased government spending, leading to an expansion of the government's fiscal deficit and debt, which may intensify market concerns about the U.S. government's debt repayment ability. In this case, bond investors will demand higher long-term interest rates to compensate for potential fiscal risks, thereby pushing up long-term interest rates Analyst Engelke from Capitol Securities stated that neither Biden nor Trump has put forward specific plans to control the growing fiscal deficit and interest costs in the United States, both of which currently far exceed defense spending.

Robinson pointed out that the greater the likelihood of Trump's election, the steeper the yield curve. This is because whether it's imposing tariffs, deporting immigrants, or implementing expansionary fiscal policies, Trump's potential presidency implies a rise in inflation. In that case, the Federal Reserve may adopt a tightening monetary policy to control inflation, which could lead to an increase in yields on short and long-term bonds.

Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott, stated that after the one-sided presidential debate, the yield curve has indeed steepened, clearly influenced by the election dynamics