Mark Dowding, chief investment officer of BlueBay, a top global asset management company under Royal Bank of Canada, said that given that the policy platforms proposed by both US presidential candidates will stimulate inflation, the Federal Reserve may have to raise interest rates next year.

Betting on this, Dowding expects the breakeven rate on U.S. bonds, an indicator of inflation expectations, to widen further. He also expects the U.S. Treasury yield curve to steepen sharply as long-term Treasury yields rise faster than short-term Treasury yields. This is because he believes investors will demand a higher premium to compensate for the inflation outlook, especially if Trump wins next month's election.

“I would not rule out at all the possibility that the Fed could cut rates one or two more times,” Dowding told Bloomberg TV. “But if we do see Trump’s policies become significantly more inflationary in terms of tariffs, restricting immigration, tightening the labor market and providing further fiscal stimulus, who can guarantee that by the middle of next year we won’t be talking about the Fed raising rates, not cutting them.”

The U.S. five-year bond breakeven rate climbed after falling to its lowest level since 2020 last month, as traders sharply reduced their expectations for Federal Reserve rate cuts after a recent batch of data pointed to unexpectedly strong U.S. economy and led to a rebound in inflation expectations.

US five-year bond breakeven rate

Dowding said in another interview that he bought the five-year U.S. breakeven rate below 2% and expects it to rise to 2.5% in the coming months. He also believes the yield spread between the two-year and 30-year U.S. Treasury bonds could surge to 150 basis points from the current 35 basis points "when the time is right."

Dowding's concerns about the U.S. fiscal outlook come as Republican presidential candidate Donald Trump and Democratic presidential candidate Kamala Harris are trying to appeal to voters in key battleground states with a range of economic policies, including tax cuts.

Dowding also noted that geopolitical tensions would also push up energy prices. Crude oil futures have already risen about 7% this month on jitters over escalating hostilities in the Middle East, adding to broader inflationary pressures.

The article is forwarded from: Jinshi Data