“I only trusted Harris”… Goksori, a Seohak ant who bet on U.S. Treasury bonds

The U.S. Treasury market was turbulent as news broke that former President Donald Trump had won the 47th presidential election.

It is a similar trend in the short term to the 2016 presidential election, when national bond prices plummeted after candidate Trump won a close race over Democratic candidate Hillary Clinton.

On the 7th (local time) on the Tokyo Stock Exchange, the ‘Blackrock iShares U.S. Treasury Bond ETF with a Maturity of 20 Years or More’, a yen hedged exchange-traded fund (ETF) that invests in long-term U.S. bonds, rose by more than 2% in two trading days since the 6th. It fell. This is the result of investors turning to selling U.S. Treasury bonds as the possibility of Trump winning the presidential election increases as the U.S. presidential election count progresses.

Based on today’s tally from the Korea Securities Depository, this ETF is the stock held the most by domestic investors in the Japanese stock market. The total amount of stocks in storage as of the 5th of this month was $758.39 million (about 1.0586 trillion won), exceeding 1 trillion won.

The prices and yields of government bonds move in opposite directions. When government bond prices fall, the prices of ETFs that track them also fall. As the value of the yen plummeted against the dollar around the news of Trump’s election, Korean investors must take into account not only losses due to the decline in the price of the ETF, but also foreign exchange losses.

Previously, on the New York Stock Exchange on the 6th, the ‘Direxion Daily 3x Leveraged U.S. Long-Term Treasury Bonds with Maturity of 20 Years or More’ ETF (TMF), preferred by Korean investors, plunged 8% in one day. This ETF was the second largest net purchase by domestic investors among all overseas stock markets in the month since the 7th of last month, with a net purchase amount of $125.27 million.

According to Wall Street analysis, the reason for this sharp drop in the price of long-term U.S. Treasury ETFs is due to an adjustment taking place in the New York bond market.

JP Morgan said, “According to customer trading data, the net long positions in U.S. Treasury bonds maturing on the 4th to 8th of this month were the highest since the week of August 12th,” adding, “This is because traders were betting on the victory of Democratic presidential candidate Vice President Kamala Harris.” “It is a result,” he explained. However, with Trump elected, short-term adjustments are inevitable.

In fact, according to the U.S. Treasury on the 6th, the yield on two-year maturity Treasury bonds, which serves as a market interest rate guideline in the New York bond market, closed at 4.27%, a sharp increase of 8 basis points (=0.08 percentage points) from the previous day.

This is the first time it has exceeded 4.2% since July 31 (4.29%). At that time, government bond prices plummeted because the U.S. Federal Reserve (Fed) froze the base interest rate contrary to market expectations and warned that high interest rates could continue.

In addition, the yield on 10-year government bonds, which serves as a ‘long-term market interest rate guideline’ for home mortgage loans, automobile loans, and corporate loans, rose by 16 basis points to 4.42%, and the yield on 30-year government bonds, the longest maturity, also soared by 16 basis points to 4.60%.

The market is concerned about a second Trump tantrum.

Previously, in 2016, the New York stock market experienced a ‘Trump seizure’. Around November 8, 2016, when then-candidate Trump broke expectations and confirmed his election as president, the yield on 10-year U.S. Treasury bonds, which was 1.85% per year before the presidential election, recorded 2.61% per year in mid-December of the same year, just over a month later. It jumped 76bp in just over a month.

This was the result of market expectations that the large-scale fiscal spending pledges, such as $1 trillion worth of infrastructure investment, emphasized by then-candidate Trump would lead to an increase in government bond issuance, thereby lowering government bond prices (raising government bond yields).

The 2-year and 10-year Treasury yields jumped 68bp and 77bp, respectively, from September 10th, when the first televised presidential debate between Trump and Harris was held, until the 6th of this month, and the 30-year Treasury yield rose 73bp during the same period.

There are two main reasons for stimulating the sell-off of U.S. Treasury bonds. One is investors’ anxiety that if Trump implements a large-scale corporate tax cut as promised, government bond issuance will increase to make up for the shortfall in tax revenue or the U.S. fiscal deficit will worsen. .

In addition, there are concerns that if Trump imposes additional tariffs on imported goods while promoting America First as his core value as promised, inflation may rebound as import prices rise, and this may cause the Federal Reserve to slow down the rate of interest rate cuts.

In fact, according to the Chicago Mercantile Exchange (CME) Fed Watch tally on this day, investors in the federal funds rate futures market, which is the US version of the base rate, set the probability that the federal funds rate in June next year will be 3.50-3.75% per annum at 15.6%, compared to the previous day (22.1%). significantly lowered. This is due to the expectation that it will be difficult for the Federal Reserve to lower interest rates as much as market expectations.

However, some say that the recent market seizure is excessive. Stephen Innes, a partner at SPI Asset Management, predicted, “Although bond yields are rising, the actual Trump fiscal stimulus plan is likely to be resisted by fiscal hawks within the Republican Party in Congress, and in this case, it will be difficult for Trump to live up to his pledge.”