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US Treasury yields are holding up largely to the surprise of many as current political uncertainty typically fuels buying pressure in bonds, but Macquarie offers a simple explanation: the increased odds of a Trump election victory.
“It is no coincidence that US Treasury yields have been rising alongside the improving prospects for Donald Trump’s US presidency (since late last week),” Macquarie said in a recent note, predicting that a second Trump administration would be more inflationary than a second Biden administration.
US Treasuries, which trade inversely to yields, have been in a slump since last Thursday’s presidential debate… despite a period of weak US economic data — including purchasing managers’ indices, initial jobless claims and inflation — which, Macquarie says, may be due to Trump’s higher chances of winning.
US Treasury yields have risen as “the likelihood of a Trump victory increases, and because his domestic and international economic agenda includes some key issues that could be considered more ‘inflationary’ than Biden’s,” Macquarie added.
A potential second Trump administration would likely include an agenda that takes a tougher stance on immigration, imposes tougher trade tariffs, and possible tax cuts that would ease the stranglehold on inflation.
Macquarie predicts that Trump’s immigration agenda could restrict immigration more effectively than Biden’s, and the former president could implement deportations of undocumented immigrants, putting about a million workers out of the labor force. This would “constrain the supply of low-cost labor, putting upward pressure on wages, at least in the market’s imagination,” Macquarie adds.
Trump has been vocal about the need to raise tariffs on China and the rest of the world, and that is expected to push up import prices — Moody’s (NYSE:) estimates that could lead to a 0.7% increase in CPI inflation in the year after the tariffs are enacted.
Meanwhile, on tax cuts, Trump is likely to extend the 2017 Tax Cuts and Jobs Act beyond its expiration in 2025, pushing the federal deficit higher than it would have been under Biden, who would allow the tax cuts to be rolled back, Macquarie said.
