Markets are sniffing out a Trump victory on November 5th. The Real Clear Politics average of betting odds gives Trump a 60% chance of victory, closing in on the highs that eventually forced President Biden to withdraw. According to Polymarket, the odds of a Trump victory have risen to 63.7%, with the probability of a Republican sweep rising to 45%. The polling data are much tighter, but the bond market is siding with the betting odds for now. The 30-year Treasury yield is up 46 basis points YTD to 4.49%.
To be clear, the Committee for a Responsible Federal Budget (CRFB) found that both Vice President Kamala Harris and former President Donald Trump would likely further increase deficits and debt above levels projected under current law. Neither candidate, nor party, has put forward any credible proposals to tackle the unsustainable trajectory of the public finances. Treasury yields would have had to rise anyway, to reflect this reality.
It is not just Trump: the bond market is adjusting, once again, to the fundamentals of the economy. The tax receipts data are more aligned with an acceleration, rather than a slowdown, in economic growth. Withheld individual income tax receipts climbed 7.9% y/y (6-month moving average) in September, the largest such increase since May 2022. According to the Atlanta Fed, real GDP growth is tracking at an annualised 3.4% q/q in Q3, after September retail sales boosted the estimate for real PCE to an annualised 3.6% q/q.
Households have continued to deleverage. Corporate profits are at record highs, with net interest payments sliding. The US ran a $1.83tr deficit in FY24, after running a $2tr deficit in FY23, which has supported corporates & households, but has left the Treasury exposed to higher-than-forecast real yields. If the risks are transferred from the private sector to the federal government, then perhaps a premium should be demanded for holding government debt. It makes sense that stocks have outperformed bonds in this environment.
