The "Trump trade" in the bond market has stalled, with investors refocusing on economic data and the Federal Reserve

Zhitong Finance APP noticed that as Vice President Kamala Harris gained support from Democrats, bond traders are reevaluating the so-called Trump trade, weighing political turmoil against upcoming economic data and future US interest rate trends.

With trading volume rebounding at midday in New York on Monday, bond yields across maturities rose by 3 to 5 basis points. These moves set the stage for a series of auctions this week, US economic growth reports, and updates on inflation indicators favored by the Federal Reserve.

George Catrambone, Head of Fixed Income at DWS Americas, said, "Investors' attention should refocus on fundamentals and Fed policy." While markets may fluctuate due to political news, "trading around elections is often foolish behavior."

Trading in the US Treasury market over the weekend showed that investors are starting to prepare for President Biden's decision not to seek reelection.

This implies a slight flattening of the US yield curve, signaling a weakening momentum of betting on rising bond yields, one of which is known as the "Trump trade" - a bet that benefited from Trump's advocacy of loose fiscal policy, increased trade tariffs, and relaxed regulations.

The election campaign still has about three months to go, and some traders believe that Biden's withdrawal from the race could intensify competition. Harris has quickly consolidated support from Democratic heavyweights for her new round of presidential campaigns, seemingly clarifying the path to nomination.

However, despite the market turmoil caused by the election, the main driving factors for yields remain speculation on the extent of economic slowdown - and to what extent this forces the Fed to start a loose cycle.

Scott Buchta, Head of Fixed Income Strategy at Brean Capital, said, "The election does have an impact on certain areas of the market, such as the money market, but currently US Treasury prices are mainly driven by US economic data and the Fed's actions."

Investors expect the Fed to cut rates at least twice by the end of 2024 (starting in September). Decision-makers are expected to keep the benchmark rate unchanged at the eighth meeting next week, a year since the Fed first reached the current target range of 5.25% to 5.5%. Fed officials were in a communication blackout before announcing the rate cut on July 31.

A rate cut is expected in September, boosting policy-sensitive US Treasury prices and narrowing the spread between longer-term US bonds for most of July.

Less than a week ago, the yield on the two-year US Treasury note was about 20 basis points higher than the ten-year yield, the lowest level since early January. On Monday morning, the two-year yield briefly rose 30 basis points higher than the ten-year yield Later this week, traders will welcome key economic data, with the release of the second-quarter GDP data on Thursday. On Friday, the Federal Reserve will release its closely watched inflation gauge - the Personal Consumption Expenditures Price Index. Earlier this month, consumer prices unexpectedly fell in June, led by the services sector, with the latest core PCE index expected to drop from 2.6% in May to 2.5%.

These data will be released ahead of the Federal Reserve's July meeting, with investors closely watching the meeting for any clues on the timing of a rate cut.

Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree, said: "It seems that we know more about monetary policy than potential fiscal policy." For him, the policy statement to be released by Federal Reserve officials next week is crucial. "From a political perspective, there are too many unknowns."