Between the US election and the presidential inauguration, the markets are now in somewhat of a state. “The calm before the storm”. Investors are analyzing the yield implications. Treasury statunitensi.
“We continue to expect higher medium and long-term Treasury yields, with the curve steepening with government rate cuts. Federal Reserve Anchor i Short term returns. So much so that we could see the 10-year Treasury yield reach 5% by the first quarter of 2025,” he points out. Arif Hussain, Head of Fixed Income e Chief Investment Officer, Fixed Income, T Row Price Explaining that new relevant information will be taken into account with the new US administration and, of course, there are some uncertainties and different scenarios. 10-year Treasury yield is possible. 6%? Why not? We can consider that, though, when we go to 5%.
What can drive long-term Treasury yields?
US Fiscal Expansion Continues, Expert Emphasizes US Budget Deficits for Fiscal Year 2024 of 7.0% of gross domestic product (GDP), according to the Congressional Budget Office. With the Trump administration’s promise of tax cuts, a significant reduction in the deficit is unlikely. The Treasury Department will have to continue to flood the market with new debt issues to cover the budget deficit. increasing returns. Moreover, one must consider that most other governments around the world are doing the same thing, raising global production as they compete for demand. Often, the U.S. fiscal situation is viewed in isolation, but doing so could be a serious mistake, considering that after many government budgets.Covid has spread globally.
The US economy remains healthy.. The Fed appears to have successfully guided the economy to a soft landing. We see little chance of a recession on the horizon, especially if the post-election demand scenario plays out. La Fade It also appears committed to continuing the easing of monetary policy, even as markets and policymakers have sharply moderated the number of rate cuts expected over the next 12 months, raising the prospect of a recovery in inflation. have increased It seems that the path to an economic recession must go through a split in the financial markets.
Foreign demand for Treasuries is falling.
There is evidence that foreign demand for Treasuries is slowing. Japanese Treasury Reserves Falling to around $1.1 trillion in September 2024 from a peak of $1.3 trillion in 2021. With the Bank of Japan preparing to raise rates again in 2025, more Japanese investors may abandon US Treasuries for their domestic market. China’s holdings of U.S. Treasuries fell from about $1.1 trillion in 2021 to about $770 billion in September 2024. Treasuries have become more volatile than other highly rated developed market government bonds, and even some emerging market sovereigns. Put some investors away.
Make inflation great again
Inflation has moderated recently, but many policy measures appear to support both inflation and growth. Tariffs, for example, are potentially inflationary. But of all the US administration’s campaign promises, future changes to immigration policy will likely be the biggest trigger. of inflation. The counterargument is that, under President-elect Trump’s last term, inflation stagnated as companies absorbed price changes. Has the experience of the pandemic changed the ability to pass on price increases to consumers? What seems clear, however, is that without the help of the Middle East, it will be difficult for US oil suppliers to create a downward movement through the energy channel.
What can stop Treasury yields?
Hussain points out that regulatory changes could stimulate demand for Treasuries from US banks. The Fed’s recent guidance on banking regulation, which clarifies the scenarios in which banks may change i. Treasuries in liquidity. Through the Fed’s discount window, they can encourage banks to hold more Treasuries instead of reserves. Banks that need liquidity under stress (as was the case during the regional banking crisis of March 2023) can now obtain stress-tested credit for lending reserves using Treasuries held on the discount desk. The Fed is trying to reduce the market’s long-standing stigma that over-the-counter lending is a last resort for troubled banks.
There is also a fear of deterioration of the Fed’s independence. can affect the quantitative hardness. (QT). Rumors that the Fed is becoming less independent and under political pressure have increasingly permeated the US interest rate market. United States, MWhile the president-elect considered whether he should exercise more influence over the central bank. Political forces may encourage the Fed to slow or stop QT before it becomes prudent or resume bond purchases. Even mere rumors of worsening Fed independence can lead markets to price in higher demand for Treasuries.
A limited market reaction makes no sense.
After jumping to about 4.50 percent shortly after the election, the 10-year Treasury yield at the start of December was about 10 basis points lower than on Nov. 4, when it was 4.29 percent, the expert said, explaining that the difference The yield on the 10-year Treasury was up 7 basis points in early December compared with 10 basis points the day before the election. These production movements, in our opinion, do not make much sense. Even taking into account that it will take time for the new US administration to implement the programs, “the political uncertainty that preceded the US election is over and long-term Treasury yields are expected to rise, Sharpening the yield curve.”
