There are about two weeks left until the election on November 5. On Monday, Treasury yields continued their rise from September’s lows. This was partly caused by growing concern about the direction of the U.S. debt, no matter who wins the election.
Monday’s rise in yields, which was caused by a general sale of U.S. government debt, made the benchmark 10-year rate TMUBMUSD10Y 4.207% and the 30-year rate TMUBMUSD30Y 4.504% reach their highest ending levels since late July. The policy-sensitive 2-year rate TMUBMUSD02Y 4.047% also ended above 4%, which was the highest level it had been in two months.
Bond prices have gone up since the middle of September. This is partly because of signs that the U.S. economy is still doing well, but it’s also because of the possibility of a bigger government deficit, say Emily Roland and Matt Miskin, co-chief investment strategists at John Hancock Investment Management. This is shown by the fact that the term premium on the 10-year Treasury is going up. This is the extra money that investors need to pay for the risk of keeping longer-term Treasurys.
Lawrence Gillum, chief fixed-income strategist for broker-dealer LPL Financial in Charlotte, N.C., said, “The initial move seen with yields moving higher since September 16—even before the Fed cut its main policy rate—was based on stronger economic data.”
Gillum said on the phone on Monday that “market participants are starting to pay more attention to deficits” now that the 10-year Treasury term premium has turned positive. Since the bond market isn’t afraid about a coming recession as much, the possibility of rising deficits is becoming a bigger problem. The amount of Treasury debt that’s expected to come into the market is now what the markets are interested in.
Last week, it was reported that the national deficit reached more than $1.8 trillion in fiscal 2024, which is the third-highest amount ever. According to a report released this month by the nonpartisan Committee for a Responsible Federal Budget in Washington, D.C., both Vice President Kamala Harris (Democratic nominee) and former President Donald Trump (Republican nominee) would likely make the deficit even bigger with their plans for taxes and spending.
On Monday, different polls showed that the race between the two candidates was very close in a number of key states.
Jason Pride, chief of investment strategy and research, and Michael Reynolds, vice president of investment strategy, at Philadelphia-based Glenmede, which manages about $45 billion in assets, say that the policy ideas that Harris and Trump have already put forward “add up to rather significant expansions of the federal deficit” if taken at face value.
Pride and Reynolds wrote in a note on Monday that different election outcomes could lead to policies that would lead to an extra $3.1 trillion to $3.8 trillion in deficit spending over the next 10 years, “though the configuration of new spending priorities that get there may differ.”
The 10-year note and 30-year bond saw their yields jump about 10 basis points to 4.18% and 4.49%, respectively, on Monday, which was a big day for selling Treasurys. It went up 7 basis points to 4.02% for the 2-year bond. While this was going on, most of the big U.S. stock indexes, including the Dow Jones Industrial Average (DJIA), SPX, and COMP, closed down.
Steven Ricchiuto, an economist at Mizuho, said, “Neither candidate’s plans put a lot of emphasis on being responsible with money.” In the coming years, coupon issues on the Treasury market will likely need to get “dramatically” bigger. This is because the government spending that would be needed could put a lot of pressure on the bill market.
Ricchiuto also said that the results of the races for Congress are important and that the deficit could get bigger if the same party rules both the White House and the House of Representatives. It’s not as important to control the Senate because the majority is expected to be very small and the vice president has the power to break a tie in the upper house of Congress, he wrote in a note.
