Bond yields have risen sharply in recent weeks, and the popular narrative is that the market is voting for Donald Trump.
The economy is not only doing very well right now, but it is getting better. The market responded by pushing the 10-year Treasury yield up about 0.6 percentage points last week to 4.25%.
The move is based on fears of higher inflation, after the Federal Reserve cut interest rates by half a percentage point in September, with the economy strong and unemployment falling. Benefits are often reduced when the economy and labor market are down.
According to Barron’s, the rise in the Bloomberg Economic Finance Index – which measures whether and by how much economic data beats or misses consensus expectations – coincided with the output of 10 -year Treasury Department.
Jim Bianco, of Bianco Research, highlighted this relationship in a webcast last week. The economy is clearly performing better than expected, raising concerns in the bond market about whether the Fed’s big rate cut is the right thing to do.
To be sure, long-term interest rates rose in tandem with market expectations that Trump would win the election, but correlation should not be confused with causation..
Likewise, it is hard to believe that the bond market suddenly ran into a budget deficit. After all, the current Biden administration just ended fiscal year 2024 with a deficit of $1.8 trillion, equivalent to about 6.5% of GDP.
Both Trump and Kamala Harris are promoting policies that will only increase the deficit. However, there are differences between the tax and cost proposals of the two candidates. Trump’s plans would increase the deficit by $7.5 trillion over 10 years, while Harris’ proposals would increase it by $3.5 trillion, according to projections from the nonpartisan Committee for a Responsible Federal Budget..
“We are more skeptical that a Trump win in 2024 would mean more fiscal stimulus,” Capital Economics’ macro and markets teams said in a note.
The Strategas team in Washington, led by Dan Clifton, suggests that the Treasury Department could put less pressure on the bond market, and that it will result in another round of financial crime as the debt ceiling peaks in January, freeing up liquidity in the treasury. system and draining it.
In addition, Stratigs’ Clifton believes that deficit estimates from the Congressional Budget Office for fiscal year 2025 will have to be reduced from $1.9 trillion, in part due to capital gains taxes due to increases in stock prices. this year.
The “wealth effect,” which led to the S&P 500’s 41% rise from its 52-week low, and rising home prices, along with stimulus, said Doug Ramsey, chief investment officer at Leuthold Group, in the Thursday webinar the financial deficit is the reason the US economy faces continued recession expectations.
Trump’s proposed tariff increases could raise $331.1 billion from a 20% tax on all imports as well as a 50% tariff on imports from China, according to estimates by the Tax Foundation.
But it would be a stretch to blame the prospect of a Trump presidency alone for a rise in long-term interest rates, and the Fed’s decision to cut rates while to indicate that the economy is strong, thus putting the risk of higher inflation.
2024-10-26 16:00:00
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