Financial giants from Goldman Sachs & Co. to Morgan Stanley and Barclays Plc. they take a fresh look at how Donald Trump’s victory in November could play out in the bond market.
After last week’s debate hurt President Joe Biden’s re-election chances, Wall Street strategists are urging clients to position for sticky inflation and high long-term bond yields.
At Morgan Stanley, strategists including Matthew Hornbach and Guneet Dhingra argued in a weekend note that “now is the time” to bet on long-term interest rates rising against short-term ones.
Trump’s rise in the polls since Thursday’s summit means investors need to think about economic policies that could lead to further rate cuts at the Federal Reserve, as well as a Republican sweep leading to fiscal expansion and long-term pressures on higher bond yields, Morgan Stanley said.
Barclays, meanwhile, said the best response to the growing prospect of a Trump victory is to hedge against inflation. Strategists Michael Pond and Jonathan Hill wrote on Friday that the most obvious statement is betting that five-year Treasury inflation-protected securities, or TIPS, will outperform five-year ordinary notes.
Third-party investors like Jack McIntyre, portfolio manager at Brandywine Global Investment Management, are increasingly taking notice.
McIntyre said he is “concerned that the bond watchdogs are coming out early in response to the controversy.” The chances of a Republican sweep in November will increase from a combination of “Biden’s performance, weak data, high oil prices.”
US Treasuries fell on Monday, pushing yields to their highest levels in more than a week, in what traders said was a continuation of last week’s slump and Trump’s second chance.
Treasuries extended their losses after the Supreme Court ruled in a case that would reduce the chances of Trump facing trial before the November election on charges of trying to overturn the 2020 election.
The rise in Treasury yields was led by longer maturities, with 30-year bonds rising eight basis points to 4.65%, the highest level since May 31.
Not everyone on Wall Street is convinced that higher long-term Treasury yields and steeper curves are inevitable.
“Although the term premia-driven selling has been a consensus on how US profits should react to a Republican victory, we see arguments for risk-taking,” said Goldman Sachs strategists led by George Cole and William Marshall after the debate. They see investors’ focus shifting from spending to the risks of higher taxes, which could weigh on productivity and growth as elections begin.
With the makeup of Congress after November unclear, views on how Trump’s policies will impact markets are low, said Kathy Jones, chief fixed income strategist at Charles Schwab.
“The change in the narrative about what policy is going to be after the election is probably the biggest risk to the Treasury market,” Jones told Bloomberg Television on Monday. “I think it’s too early. Presidential candidates can say a lot of things on the campaign trail, but they have to get those things through Congress. “
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