In the absence of confirmation of the composition of the House of Representatives, the American Republican Party emerged as the clear winner of the elections, obtaining, in addition to the presidency, control of the Senate. This was probably the most likely scenario to happen before the polls closed. And yet the market reacted as if it didn’t expect it.
And the proof is what investors did with debt assets, fleeing US bonds when they were already trading at a loss this year, and buying other sovereign benchmarks like European ones. The market is positioning itself in an environment of deeper tax cuts and increased government spending, in addition to tariffs, all inflationary measures that will slow the pace of Fed rate cuts. The monetary institution, which closes the meeting this Thursday, will reduce. rate by 25 basis points, leaving them at 4.75%.
The 10-year American bond, in full session, falls up to 20 basis points in its biggest drop since March last year. Thus, on the secondary market, profitability is already required T-note 4.46%, the biggest since Juneincreasing losses in the year for an asset set to recover after last year’s collapse and with the prospect that the start of rate cuts would drive up sovereign bond prices. These losses already exceed 4.5% since January 1.
“The bond market has been worried about the election outcome for some time and this is now reflected in volatility. The US 10-year bond has increased its yield by 80 points since mid-September,” it explains. in Julius Baer. “Despite this sharp increase yieldsit is difficult to say that an attractive entry point has been reached and we do not recommend starting to excessively lengthen the durations since the refinancing risks can be reduced with average durations, from 3 to 7 years”, add – they.
Regarding the independence of the decisions that the Federal Reserve can now make, analysts agree that Trump will not be able to intervene, as he suggested in a statement. “Trump has limited possibilities for influence: he can publicly pressure the Fed and appoint committee members, but his room for maneuver over the institutional structure is minimal since he would need 60% of the Senate,” explain Flossbach von Storch.
For the months to come, the market is only counting on this Thursday’s decline and will not see any more at the December Fed meeting. In fact, he only forecasts 100 basis points lower a year from now. “It is widely believed that both parties will continue to run budget deficits and maintain fiscal stimulus. The effect of this on the Fed may take some time to be felt and the market must now ask whether “rising Treasury yields could represent an additional problem for the economy and an obstacle to a soft landing which is still taken into account”, they explain in Janus Henderson.
Mixed tone in Europe
Trump’s victory not only has implications for American markets, but also consequences for virtually the entire planet. On this side of the Atlantic, the reaction to the White House results leaves one mixed tone in fixed incomewith sales in all main references except the German one, which means risk premiums have increased.
“In Europe, the main lesson is that the ECB will have to accelerate its rate cuts as the economy is unlikely to improve due to the possible impact on the export sector that possible tariffs will have “, underlines AXA IM. “The ECB is the only institution capable of reacting quickly,” they add.
