Economic Uncertainty Looms as Presidential Election Approaches
As the presidential election draws near, financial markets are bracing for potential economic growth and inflation under a Donald Trump presidency. If Trump were to defeat Kamala Harris, some experts predict rising fiscal deficits and a possible global trade war, leading to higher inflation and bond yields. This could have negative implications for fixed-income investments.
The Return of “Bond Vigilantes”?
Investor Ed Yardeni warns that traders may force the government’s hand by selling or eschewing government debt, driving up yields. Specifically, he cautions that the 10-year Treasury yield could surge above 5%, a level not seen since 2007. Yardeni believes that the bond market is sending a warning signal to the Federal Reserve, which is expected to cut interest rates again this week.
Fiscal and Monetary Policy Concerns
The central bank’s actions, combined with large fiscal deficits, are contributing to inflation expectations and higher yields. Komal Sri-Kumar, president of Sri-Kumar Global Strategies, notes that the bond market is signaling that the continuation of large fiscal deficits and lack of monetary discipline warrant higher yields. The Federal Reserve risks ignoring this signal at its own peril.
Trump’s Proposals Under Scrutiny
Trump’s policies, including increased tariffs and deportations, have raised concerns about inflation and economic growth. A report from the Peterson Institute for International Economics predicts that these policies could lead to lower national income, employment, and higher inflation. Other experts, such as Morgan Stanley and JPMorgan, have also issued warnings about the potential inflationary effects of Trump’s policies.
Market Reactions and Predictions
Despite these concerns, some Wall Street analysts believe that the recent surge in yields will reverse itself as the Fed continues to cut rates and macroeconomic growth settles back to long-term trends. Evercore ISI predicts that higher inflation under Trump would translate into a quarter percentage point higher baseline funds rate compared to a Harris presidency. Stocks have performed well under Trump, and some analysts tie the recent equity rally to rising odds of a Trump win.
Uncertainty Ahead
As the election approaches, market uncertainty is likely to persist. However, some experts believe that the impact of the election on the bond market will ease once the results are known. Jim Paulsen, a market veteran, notes that economic momentum is poised to moderate, which could end the latest interruption in the bond market.
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