Bond yields owe a debt to presidential politics

Politics does translate into economics. The morning right after last week’s presidential debate, the bond market had something to say: Yields on the 10-year Treasury note jumped on the increased odds that Donald Trump and other Republicans might win this fall — which comes with implications for everything from inflation to immigration.

The 10-year Treasury is called that for a reason. It promises to give investors a return on their money that looks good now and 10 years from now. In other words, it has to be competitive with the interest rates and inflation of the present and the future. 

So if the 10-year yield rises today, it means investors think the interest rates or inflation of tomorrow might be higher than expected.

“If you think about the policies you might get from a new Republican administration, those things would tend to add a little bit to inflation and to government debt,” said David Kelly, chief global strategist at J.P. Morgan Asset Management. 

For starters, tariffs. Both parties have become more comfortable with them, but a Trump administration could impose more of them, Kelly said — and with them higher prices and disrupted supply chains.

“If you have higher tariffs, chances are you will end up with higher inflation,” he said. Higher future inflation that must be fought with higher future interest rates, which are partly reflected in the 10-year bonds of today.

A Trump administration would also likely try to extend more of the 2017 tax cuts than a Biden administration would, pushing up government debt.

“You could see the fiscal deficit continue to expand, with that you will see more Treasuries come to market,” said Rajeev Sharma, managing director of fixed income investments at Key Private Bank.

How do you convince the market to soak up more Treasuries in the future? Increase the yield. Again, reflected in the 10-year bonds of today.

But Democrats can overspend too, said Brian Rehling, head of global fixed income strategy at Wells Fargo Investment Institute.

“Democrats, of course, tend to have a higher propensity to spend on social programs and Republicans have a higher propensity to cut taxes — but in both cases they lead to continued deficit concerns,” he said.

So in that sense, the bond market’s reaction was not only a response to the increased chances of a Trump victory, but also the increased chances of one party controlling Congress and the White House. 

Because the way both parties spend, if either of them gets its way completely, we’re looking at higher debt. You can see it in the bond market.