By Greg Ritchie | Bloomberg
US Treasury yields surged — with the 30-year rising the most since the global flight to cash in March 2020 — as investors piled back into bets that Donald Trump’s return to the White House will boost inflation.
The longest-maturity US government bond yield climbed as much as 24 basis points to 4.68%, the highest level since May, and remained higher by about 20 basis points. Rates of all tenors rose by at least 13 basis points at one stage as traders slashed wagers on the scope of interest-rate cuts by the Federal Reserve over the next year. They still expect the central bank to cut rates by a quarter point on Thursday.
An auction of 30-year Treasury debt at 1 p.m. New York time is an additional burden for that segment of the market. Still, the yield moves are a vindication for those who doubled down on the so-called Trump Trade — higher yields and a steeper curve.
“The bond market anticipates stronger growth and possibly higher inflation,” said Stephen Dover, head of the Franklin Templeton Institute. “That combination could slow or even halt anticipated Fed rate cuts.”
As investors amp up on bets that policies such as tax cuts and tariffs will fuel price pressures, the yield on 10-year Treasuries surged 21 basis points to 4.48%, the highest level since July, aided by a large block trade in futures. They underperformed European bonds, reflecting concern about the impact of US tariff on the euro area’s export-reliant industries.
Bets on a resurgence in US inflation were shown by the two-year inflation swap rate surging 20 basis points to 2.62%, the highest since April. The price action has parallels to the aftermath of the 2016 election, when Trump’s victory sent inflation expectations surging and bonds sliding.
Freya Beamish, head of macroeconomics at TS Lombard, said the biggest topic on her clients’ minds is whether the selloff in bonds is just “a taste of things to come.”
“The question of whether Trump’s policies are capable of generating persistently higher inflation is one which we can debate for the next five years,” said Beamish. “In short, markets cannot fully price that story in today.”
The moves also signal worries that Trump’s proposals will fuel the budget deficit and spur higher bond supply.
Wednesday’s $25 billion auction of 30-year bonds is the last of three fixed-rate US debt sales this week. Buyers of 10-year notes that were sold on Tuesday face mounting losses as the yield climbs from the 4.347% auction level.
JPMorgan Chase & Co. Wednesday changed its forecast for interest rates because, economist Michael Feroli wrote, “policy uncertainties may lead the Fed to move more slowly than it otherwise would.” While the bank still expects quarter-point rate cuts on Nov. 7 and Dec. 18, the new forecast is for quarterly cuts from March 2025.
Increases in 2022 and 2023 to arrest a surge in inflation brought the central bank’s target band for the main US overnight interest rate to 5.25%-5.5%. It was lowered by a half point on Sept. 18, and policymakers indicated two more quarter-point cuts were likely by year-end. However Treasury yields have risen since then, fueled in part by US economic data outperforming expectations.
Positions adjusted
For many investors digesting the election results, the frustration will be that they eased off at the last moment after weekend polls showed US Vice President Kamala Harris gaining ground — prompting a late surge in appetite for hedges. Tuesday’s price action in Treasury futures was dominated by liquidation, with open interest dropping across most tenors as yields declined led by the long end.
There was a frenzy of trading as investors adjusted positions.
“There was tremendous volume for overnight trading,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group, who was up through the night trading. “It wasn’t like these moves were done with no volume.”
Still, some investors already see the move higher in US yields as overdone. Control of the House of Representatives remained too close to call, with the potential for a divided Congress curtailing a Trump administration’s ability to pursue its fiscal policies.
Flows in Treasury futures and options Wednesday included ones consistent with profit-taking on bearish wagers.
“The bond selloff has gone too far, expect the Fed to stay on a path toward lower rates,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “The market appears to be taking a strong view on the potential inflationary impact of Trump’s policy agenda, when there is still considerable uncertainty over the extent to which it can be implemented or its actual effect on inflation.”
–With assistance from Liz Capo McCormick and Edward Bolingbroke.