by Edward Bolingbroke
US Treasuries slumped as investors prepared for data to show a pickup in inflation, rekindling a selloff spurred by Donald Trump’s presidential victory.
Two-year bonds led the declines, with the yield rising as much as eight basis points to 4.33%, the highest since July. Cash bond markets were closed on Monday for a US holiday.
Treasuries tumbled in the immediate aftermath of Trump’s election win as investors amped up bets that policies like tax cuts and tariffs will fuel price pressures. That’s reinvigorating a focus on inflation, with data due Wednesday expected to show a slight acceleration in consumer price growth in October. Traders will also closely follow the remarks of four Fed policymakers on Tuesday.
“The worry now is around inflationary pressures of future Trump policies,” said Evelyne Gomez-Liechti, multi-asset strategist at Mizuho International. “Treasuries are still not out of the woods.”
Over the weekend, Minneapolis Fed President Neel Kashkari said the US economy has remained remarkably strong as the central bank progressed in beating back inflation, but the Fed was still “not all the way home.”
Traders in the swap market expect the Fed to deliver another quarter-point cut either in December or January, with a 60% chance of that happening this year. They have pared bets on the scope for future reductions, pricing 10 basis points fewer cuts two years ahead.
Trump’s fiscal plans also risk sending the federal budget deficit surging if not offset by massive spending cuts. That has renewed doubts about whether bondholders will start demanding higher yields in return for absorbing an ever-rising supply of new Treasuries.
Economist Nouriel Roubini said Trump’s return to the presidency could lead to the re-emergence of “bond vigilantes” if he follows through with big spending plans. “The market discipline is going to be quite quick,” if Trump pushes to make his 2017 tax cuts permanent, Roubini told Bloomberg Television.
For now, the uncertainty is pushing Wall Street strategists to hold tight to their neutral recommendations in the wake of the election. Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley strategists are all neutral on bond duration after the election and latest Fed decision.
The bond market likely remains “under the influence of the election results,” said George Catrambone, head of fixed income at DWS Americas. But investors “ought to wait to see what ultimately becomes stated policy.”
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