Stock buyers were able to handle a sharp rise in Treasury yields in the middle of the week after the election, which helped stocks reach all-time highs on Friday. Now, the question is whether they can handle market-based rates going up even more in the months and years to come after Donald Trump runs for president.
One of the most important things for the financial markets after Trump’s win on Tuesday and the expected Republican trifecta—his party taking back control of the Senate and almost certainly also the House of Representatives—is that Treasury yields will need to keep going up. This is because of a mix of policies that market participants think will boost U.S. economic growth, reduce the number of people looking for work, and possibly raise inflation risks. These policies include business tax cuts, stricter immigration rules, and trade tariffs.
The trade session on Wednesday gave us a look at how things might move in the future. After early election results came in the night before, a lot of people sold U.S. government debt. This caused the yield on the 30-year Treasury bond TMUBMUSD30Y 4.473% to rise by 15.3 basis points, which is the most in a single day since June 13, 2022. 10-year TMUBMUSD10Y rates hit a four-month high of 4.310 percent, and 30-year Treasury rates also hit a four-month high. On Wednesday, the 5-year breakeven inflation rate shot up to 2.495%, which is getting close to the 2.5% mark and shows that more people are worried about prices going up for a long time.
The stock market was still very happy after the election, even though yields went up, which makes it harder to support high prices and means that businesses will have to pay more for capital. The Dow Jones Industrial Average DJIA 0.59% hit a new high of 1,508.05 points, or 3.6%, on Wednesday. This was the biggest gain since November 1896. At the end of Friday’s trading, the Dow, the S&P 500 (SPX 0.38%), and the Nasdaq Composite (COMP 0.09%) all hit new highs.
Before the election results on Tuesday, stocks were having a hard time getting used to a 10-year yield that went above 4.3%, like it did in September and October of last year. Now, some people, like Mark Heppenstall, president and chief investment officer of Pennsylvania-based Penn Mutual Asset Management, think that a 10-year bond yield of 5% is possible. This is a level that was briefly reached in October 2023.
Heppenstall said over the phone, “My guess is that rates in the bond market will keep going up until they reach a level that the stock market doesn’t like.” He also said that there are more and more chances that the 10-year yield could go above 5%.
The October consumer-price index, which comes out on Wednesday of next week, is the next big story about inflation in the U.S. The study could change what people think will happen in December, when the Federal Reserve either cuts interest rates again or does nothing. But the general effect of the data might not last long, since people are still wondering if Trump’s victory will make price pressures worse in the future.
As it stands, the national deficit is $1.83 trillion. It is thought that Republicans won’t do much to cut it down. Heppenstall, whose business manages about $38 billion in assets, said, “the bond market could push back and force some kind of fiscal discipline.” “If tax cuts and other forms of fiscal stimulus work out, the Fed might have to stop cutting rates a lot sooner than the market thought.” That is clear from what has happened in the bond market this week.
Long-term Treasury prices went up and down a lot on Wednesday, but by Friday, buyers were back to buying 10- and 30-year U.S. government bonds and inflation breakeven rates were going down. Even though people were still worried about the U.S. budget, demand for Treasurys stayed high.
At the same time, people in the market were arguing about whether the effect that Trump’s policies were thought to have on inflation was too strong, especially if his talk about taxes turned out to be empty rhetoric. Trump wants to put a tariff of at least 60% on goods from China that come into the U.S. He also wants to put a 10% or 20% duty on all goods from other countries.
Elon Musk, a close Trump ally and economic advisor, has also talked about austerity measures that could cut at least $2 trillion from federal spending. This is a very ambitious goal that most budget experts don’t think will be met, but it has made it harder to predict what the next president’s budget plans will be and how big the government deficit will be. Along with hopes for economic restraint, there was also uncertainty about who would control the House. At the end of the week, that power was still up for grabs.
Raymond James is based in Florida and had $1.57 trillion in client assets as of September. Larry Adam, the chief investment officer at Raymond James, said that buyers are still ready to buy U.S. government debt because bid-to-cover ratios at Treasury auctions are still healthy. Adam said he doesn’t believe the Treasury market is about to reach a “crisis.”
“There is no statistically significant link between rising debt/deficits and market performance,” he wrote this week in a note. “Stocks and bonds have not been hurt by high and rising debt.”
The stock market usually goes up by about 9% in the year following an election, according to historical data. Adam also said that the results of elections and the policies that are put in place have only a “marginal” effect on the economy and markets. Basically, he told investors not to base their investment choices on who is in the White House or what kind of people are in Congress, because the stock market tends to go up over time based on fundamentals like the strength of the economy, the direction of earnings, valuations, and monetary policy.
Now the question is what next steps buyers should take. Mark Malek, chief investment officer of Siebert, an investment firm with more than $18 billion in assets under management based in New York, said that buyers still have time to take advantage of higher short-term yields. This should give people who want to buy Treasury bills and other cash-like instruments chances to do so.
Malek told me over the phone, “I’m pretty sure that there is a private agenda and a publicly stated agenda that is stimulatory to the U.S. economy. The only difference now is that those things can be put into action without any political constraints.” “There are steps that will be taken to make sure that corporate taxes go down, and it’s safe to say that most taxes will not go up but down.”
“This is good for the economy and good for stocks at a high level.” “We don’t want to be overly worried about inflation, and we’ll have to see how things go,” he said. On the other hand, “people who are waiting for the Fed to cut rates by 100 basis points in two months will be let down.” It’s likely that rate cuts will happen more slowly than people thought they would.
Monday is Veterans Day, so the bond market is closed. The NFIB optimism measure for October will be made public on Tuesday. On Thursday, we will get information about the producer price index for last month and the weekly initial jobless claims. The Empire State factory survey for November is among the data released on Friday. There are also reports on retail sales, industrial production, and capacity utilization for October.
