Treasury sell-off eases as investors weigh Trump impact

Global markets want to understand likely outcome from policies.

NOV 07, 2024

By Bloomberg

by Greg Ritchie

A seismic selloff in Treasuries paused Thursday as investors’ attention turned from Donald Trump’s victory in the US presidential election to interest-rate decisions from major central banks including the Federal Reserve.

The yield on 30-year US bonds was little changed at 4.61% after a 17-basis-point surge Wednesday — the biggest since March 2020. UK debt rebounded from three days of losses, while euro-area notes fell as investors digested news of snap elections in Germany.

Traders are looking to central bankers for any clues on how Trump’s potential tax-cut and high-tariff policies will impact their outlook for global growth and inflation. Fed Chair Jerome Powell holds a press conference after Thursday’s decision, which is expected to be a quarter-point rate cut.

The Bank of England also sets policy on Thursday and is seen lowering borrowing costs by the same amount. Governor Andrew Bailey, who speaks after the meeting, will likely be pressed on how the additional spending announced by the new UK government last week impacts the outlook for further easing.

“Chair Powell’s commentary on the current economic environment and how the next US president could likely influence the outlook will be of huge significance,” said Michiel Tukker, a rates strategist at ING. “Both are expected to cut, but communication in the wake of the likely Republican clean sweep and the UK budget could be more relevant.”

Elsewhere, Sweden’s Riksbank cut rates by half a point as expected. That contrasted sharply with neighboring Norway’s central bank, which kept its benchmark at 4.5% amid a weak krone.

The flurry of decisions sets the stage for more volatility to cap an already turbulent week. US Treasuries rallied at the start of the week, with the 10-year yield dropping 22 basis points in two sessions, after weekend polls showed US Vice President Kamala Harris gaining ground. A frenzy of trading followed as investors adjusted to results indicating Trump’s victory.

In his campaign, Trump promised to wield tariffs more aggressively against US trading partners, deport millions of undocumented immigrants and extend his 2017 tax cuts. Those policies, if enacted, could put upward pressure on prices and Wall Street economists including those at JPMorgan Chase and Co. now see fewer Fed cuts than they did before the election.

Money markets imply around 23 basis points of easing for the November policy meeting and a combined 106 basis points of cuts over the next 12 months. That compared to 115 basis points on Tuesday, before the election result became clear.

In the UK, the key issue will be how the BOE’s Monetary Policy Committee sees looser fiscal policy and increased borrowing affecting domestic price pressures. The Office for Budget Responsibility suggested that the budget policies will add as much as 0.4 percentage points to inflation in 2026.

Money markets imply 89 basis points of BOE easing over the next year, compared to 116 basis points before the fiscal plan announcement.

“The sharp post-budget selloff was as much of reaction to the OBR’s assessment of near-term inflation as to higher borrowing,” Moyeen Islam, a strategist at Barclays Plc, said. “The question is whether the MPC will also incorporate increased inflation pressure from fiscal policy in its inflation forecasts.”

Bond investors are also grappling with German Chancellor Olaf Scholz’s call for a snap election, which raises the prospect that a new administration may finance more spending in Europe’s largest economy. The nation’s 30-year yield jumped as much as 10 basis points to 2.75% and the 10-year rose above its swap rate counterpart for the first time since Bloomberg started collecting the data in 2007.

“From a market perspective, key would be whether we could get any relaxation of the fiscal rules,” said Mohit Kumar, chief European strategist at Jefferies. “There is a growing concern that for Germany to come out of the current low growth regime, they will need to provide additional fiscal stimulus.”