Bond traders are currently reassessing their strategies that lean towards a potential victory for Donald Trump. This shift comes as Vice President Kamala Harris gains traction among Democrats, prompting a review of the changing political landscape. With new economic data on the horizon and the future trajectory of U.S. interest rates in question, market operators are in a state of contemplation.
On Monday afternoon in New York, bond yields across various maturities increased by three to five basis points, reflecting heightened trading volumes. This activity sets the stage for a series of upcoming auctions, alongside a report on U.S. economic growth and an update on the Federal Reserve’s preferred inflation indicator.
George Catrambone, head of fixed income at DWS Americas, emphasized that investors should refocus on fundamental indicators and the Fed’s policies. While political news may cause market fluctuations, he pointed out that trading based on election outcomes is often unwise.
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Recently, trading activities in the U.S. Treasury market have indicated that investors are beginning to brace for President Joe Biden’s potential withdrawal from the race for reelection. This has led to a slightly flatter yield curve, indicating a loss of momentum in bets that would benefit from rising bond yields. These bets were initially predicated on Trump’s advocacy for looser fiscal policies, increased tariffs, and less regulation.
With approximately three months left in the campaign, some traders suggest that Biden’s exit could lead to a tighter race. Harris has quickly garnered support from influential Democrats for her emerging presidential campaign and appears to be on the path to secure the nomination.
Despite the political volatility influencing the market, the primary driver of yields remains speculation about the slowdown in the economy. This speculation directly impacts the Federal Reserve’s decisions regarding easing monetary policy.
Scott Buchta, head of fixed income strategy at Brean Capital, noted that elections may matter in certain market sectors, like currencies. However, Treasury bonds will primarily depend on U.S. economic data and the Fed’s actions at this point.
Investors are forecasting at least two quarter-point rate cuts before the end of 2024, starting in September. The Fed is expected to maintain current interest rates at its next meeting, keeping them unchanged for the eighth consecutive time. This marks a year since the interest rates reached their current target range of 5.25% to 5.5%. As the July 31 announcement nears, Fed bankers have refrained from public comment.
The anticipation of rate cuts in September has bolstered Treasury bonds sensitive to monetary policy and reduced the yield spread between longer-term Treasuries for much of July. Just under a week ago, the two-year yield was about 20 basis points above that of the 10-year yield, the narrowest spread since early January. In the early trading on Monday, the two-year yield temporarily reached 30 basis points above the benchmark 10-year yield, reflecting this month’s range.
Traders are awaiting key economic reports this week. On Thursday, the second-quarter GDP will be released, followed by an update on the Federal Reserve’s preferred core inflation measure, the personal consumption expenditures (PCE) index, on Friday. Following a surprising moderation in consumer prices in June, driven by services, predictions suggest that the latest PCE core reading may decline to an annual rate of 2.5% from 2.6% in May.
These figures will be closely monitored before the Fed’s July monetary policy meeting, as investors seek clues regarding the timing of future rate cuts.
Source: https://www.perfil.com/noticias/bloomberg/bc-mercado-de-bonos-reevalua-operaciones-que-preven-un-triunfo-de-trump.phtml
