Investors React Early to Potential Election Outcomes, Influencing Treasury Yields

Financial markets typically begin to consider potential election outcomes only a month or two before Election Day. However, this year, investors are starting early. Since June 27, the interest rate on 10-year Treasury securities has increased by about 10 basis points or one-tenth of a percentage point. Although this may seem minor, it represents a reversal of the recent downward trend fueled by mild inflation data and hopes for interest rate cuts, According to Yahoo.

Around June 27, a shift in investors’ interest rate outlook occurred. This coincides with the first presidential debate between President Joe Biden and former President Donald Trump, during which Biden’s performance was notably poor and raised concerns about his coherence.

Biden’s performance significantly altered the election outlook, boosting Trump’s chances of winning. More importantly for financial markets, it increased the likelihood of Trump winning alongside a Republican-controlled Congress, which is crucial for implementing presidential agendas.

“This is all about bond investors beginning to price in the possibility that not only will Donald Trump emerge victorious but that the GOP will take the House and Senate too,” wrote economist David Rosenberg of Rosenberg Research in a July 3 analysis. “Investors are sniffing something out here, which is GOP control of Congress.” report from Fortune.

Despite being a real estate developer who once called himself the “king of debt” and favored low rates, Wall Street believes Trump’s policies in a second term would likely push rates up rather than down. This is partly due to Trump’s desire to impose new tariffs on imports, which would raise prices on numerous everyday items, contributing to inflation. Additionally, built-in inflationary pressures, such as tight global energy markets and shipping disruptions in the Red Sea, are stronger now than during Trump’s previous term from 2017 to 2021.