The odds of a Trump victory have dipped, according to betting markets, heading into tomorrow’s election. Given how much bond yields have risen since the lows of September, Treasuries have been due a rally. But ultimately, Trump has not been the main driver of higher Treasury yields this year. The labour market is resilient, inflation is settling above target, and fiscal policy is very loose. The case for aggressive rates cuts was not there in the first place.
In the Eurozone too, it is hard to make the case for steep rate cuts. Core inflation (ex-food, energy, alcohol & tobacco) continues to run well above target, edging up from 2.67% to 2.68% in October. Services inflation was unchanged at 3.92%. Meanwhile, the Eurozone unemployment rate was revised down to a fresh record low of 6.3% in August and stayed there in September.
Bonds have been selling off because central banks are intent on cutting rates, against a backdrop of persistently tight labour markets and above-target core inflation. The risk is clear: if central banks continue to ease policy, the long end will continue to sell off.
Friday’s steep rise in Treasury yields is reversing today. But it still leaves Treasury yields significantly higher YTD. The gilt market’s reaction to last Wednesday’s budget is a warning to the next US administration. The 10-year gilt yield has jumped back up to 4.45%. The 30-year gilt yield has risen to 4.91%. Whoever wins on Tuesday, there is a lot more borrowing in the pipeline, with neither Democrats nor Republicans showing any desire to get the deficit under control.
