Wall Street weighs impact on bonds if Trump wins

Financial giants from Goldman Sachs & Co. to Morgan Stanley and Barclays Plc. are taking a fresh look at how a Donald Trump victory in November could play out in the bond market.

After last week’s debate hurt President Joe Biden’s chances of winning reelection, Wall Street strategists are urging clients to position for sticky inflation and higher long-term bond yields. 

At Morgan Stanley, strategists including Matthew Hornbach and Guneet Dhingra in a weekend note argued that “now is the time” to wager on long-term interest rates rising relative to short-term ones. 

Trump’s rise in the polls since Thursday’s debate means investors have to contemplate economic policies that could lead to more rate cuts from the Federal Reserve, along with a Republican sweep that leads to fiscal expansion and pressures longer-term bond yields higher, Morgan Stanley said. 

Barclays, meanwhile, said that the best response to the rising prospect of a Trump victory is to hedge against inflation. Strategists Michael Pond and Jonathan Hill wrote Friday that the clearest expression is a wager that five-year Treasury inflation-protected securities, or TIPS, will outperform standard five-year notes. 

Buy-side investors like Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, are increasingly taking note. 

McIntyre said he “is worried that the bond vigilantes are coming out early in response to the debate fall out.” The odds of a Republican sweep in November will increase from a combination of “Biden’s performance, weaker data, higher oil prices.”

US yields slipped on Tuesday after rates rose to the highest levels in weeks a day earlier in what traders said was ongoing fallout from last week’s bump in the odds of a second Trump term.

Treasuries extended their losses on Monday after the Supreme Court ruled in a case that will limit the chances that Trump will face trial before the November election on charges for attempting to reverse the 2020 election results.

The uptick in Treasury yields was led by the longest maturities, with 30-year bond yields up as much as nine basis points to a session high of 4.65%, the highest level since May 31.

Not all on Wall Street are convinced that higher long-term Treasury yields and steeper curves are inevitable.

“While a term premia-driven selloff has been consensus for how US yields should react to a Republican victory, we see arguments for flattening risk,” Goldman Sachs strategists led by George Cole and William Marshall wrote after the debate. They see investor focus shifting away from fiscal spending and towards the risks of higher tariffs, which are likely to weigh on productivity and growth as the election comes into view.

With the makeup of Congress after November unclear, assumptions about how Trump policies will impact markets are on shaky ground, Kathy Jones, chief fixed-income strategist at Charles Schwab said. 

“A shift in the narrative about what policy will be after the election is probably the biggest risk to the Treasury market,” Jones told Bloomberg Television Monday. “I just 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.”