Jamie Patton, co-head of global rates at TCW, said that investors relying on 2016 as a guide for operating in the Treasury market during this presidential election could make a big mistake.
TCW manages about $197 billion in assets, and Patton stated, "The recent rise in U.S. Treasury yields, especially at the long end, is due to the increased probability of Trump winning and Republicans controlling Congress. We believe investors are using the experience of 2016 as a guide for the direction of Treasury yields."
Although Patton noted that Treasury yields surged in the two years following Trump's victory in 2016, when Treasuries were impacted, she stated that the election eight years ago has almost nothing in common with today, especially considering the Federal Reserve's policies.
Patton noted that at that time, the Federal Reserve was on the path to raising short-term policy rates. Ultimately, rates peaked at about 2.4%, while after the global financial crisis, rates remained near zero for a long time.
However, in September, the Federal Reserve began to lower interest rates from a high of 5.25%-5.5%—the first rate cut in four years—and plans to gradually reduce them to about 3.5% next year.
Discussing the Treasury sell-off, Patton said, "The recent rise in U.S. Treasury yields is a great buying opportunity because it is not fundamentally driven."
Her team expects that higher interest rates will take time to take effect, but ultimately will force the Federal Reserve to cut rates for the economy, possibly even reversing its current gradual rate-cutting stance at a faster pace.
Since September, the rise in U.S. Treasury yields has been significant, which will make borrowing costs higher for the government, businesses, and households. After maintaining restrictive rates for about two years, the Federal Reserve has been seeking to ease borrowing conditions to avoid an economic recession.
The yield on the 10-year U.S. Treasury fell about 1 basis point to 4.26% on Wednesday, but is 64 basis points higher than the one-year low in mid-September. In comparison, on November 7, 2016, the day before Trump defeated former Secretary of State Hillary and won the election, the 10-year Treasury yield was close to 1.8%.
Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated, "I think the market is very confident they know the outcome of the election. In 2016, the market was absolutely certain Hillary would win; this time it seems confident in a scenario where Trump wins and the Republicans control Congress."
Although national polls remain too close to call, betting markets have leaned towards a comprehensive victory for Trump and the Republicans in Congress. Trump's proposed tariffs and tax cuts have raised fears in the market regarding U.S. fiscal stability.
These concerns have driven up long-term U.S. Treasury yields, even though Harris also promoted policies that could increase the deficit.
Goldberg from TD Securities said in a phone interview that both candidates are "not favorable for fiscal dynamics," while also warning investors to be cautious of potential election surprises. He said, "If Harris wins, the interest rate market could see a lot of rebounds."
Another concern regarding the election is that the results may take time to determine, and uncertainty could extend to the Federal Reserve's rate decision on November 7.
Goldberg said, "It has already been a 'tricky' year. I think many investors want to protect their gains or hedge against losses."
Article forwarded from: Jinshi Data