Traders across the globe are reviewing the path of US interest rates as the possibility of a Trump presidency becomes a reality, which could lead to reflationary policies. October has seen 10 year treasury yields increasing by 0.4% points to 4.2% due to an emerging Trump Trade* and data showing strong economic figures. Since the last rate cut in September, two-year treasury yields also increased by 34 basis points. The Federal Reserve has also recently adopted a more cautious tone over the pace of future interest cuts, especially as data released is showing a more robust US economy.
*Trump Trade – The financial markets regard the Trump Trade as a view that less regulation, lower taxes, less immigration, and higher tariffs could benefit certain sectors and industries, and have important implications for inflation and bond yields.
Experts advise that investors and traders alike are scaling back bets on another interest cut by the FOMC (Federal Open Market Committee) at their next meeting on 6th/7th November 2024. Originally market sentiment was in favour of yet another interest rate cut since the Federal Reserve cut interest rates by 0.5% on 18th September 2024 and were indicating that further interest rate cuts were in the pipeline. However, the recent economic data indicates that there is no need for another interest rate cut of 0.5%, whilst at the same time analysts advise that traders have locked in volatility ahead of the US election and the UK budget.
The big sell-off in US treasury bills has affected both the commodity markets and the currency markets, with the USD Dollar having its best month for 2 years up over 3% against a basket of currencies. In the swaps market, trading experts suggest that there is an increased possibility of the Federal Reserve holding interest rates steady at one of their two upcoming meetings. Furthermore, as the presidential race is now neck and neck, with some polls suggesting a small lead for Trump, this has increased the possibility of tax cuts, tariffs and other policies which will inevitably put upward pressure on bond yields.
Elsewhere in the financial markets some experts have advised that inflation is trending lower, leading to expectations that the Federal Reserve will reduce rates at the next meeting in November. Others suggest that the sell-off, despite the presidential election, will continue to gain momentum whereby the Federal Reserve will continue to cut rates thereby generating an underlying bid for treasuries. However, the combination of election hedging US debt supply may well see an increased volatility in the US Treasury market.
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