Investing.com — The rise in U.S. Treasury yields following last week’s debate between President Joe Biden and Republican nominee Donald Trump could be a signal that the bond market is pricing in a victory for Trump in November’s presidential election, according to analysts at Yardeni Research.
It had been hovering around 4.29 percent before the debate and hit 4.48 percent on Monday, its highest level since May 31. Yields typically move inversely to prices.
The rise in yields came even as the personal consumption expenditures price index, the Fed’s preferred inflation gauge, suggested inflation remained subdued last Friday, a trend that is seen as buoying expectations that the Fed will cut interest rates, which are at their highest in more than two decades, later this year.
“We believe the bond market is reacting to the increased likelihood of President Donald Trump winning a second term,” the analysts said.
Analysts argued that bond investors expect a return of President Trump to power will lead to a combination of “stronger economic growth” and “higher inflation.”
On the other hand, if President Trump chooses to extend the 2017 personal and estate tax cuts that are due to expire next year, analysts predict the Treasury Department would be forced to borrow more, “which would create a surge in supply that exceeds demand at current rates.”
The rise in yields is likely to be led by the longer end of the yield curve, analysts said, suggesting that while the market’s longer-term economic expectations are shifting, the Federal Reserve’s near-term outlook for interest rates has “not changed much.”
