The Lombard Review
Markets & Finance

Election night for the bond market

Fiscal expansion priced into long end

The U.S. Capitol and the Grant Memorial
The U.S. Capitol and the Grant MemorialPhoto: Martin Falbisoner / Wikimedia Commons, CC BY-SA 3.0
1 min read Data: 10Y ~4.3%, +60bp since Sep

As election night returns confirmed Donald Trump’s decisive victory alongside a Republican sweep of Congress, the US sovereign bond market delivered an immediate, violent verdict. The benchmark ten-year Treasury yield surged by sixteen basis points to 4.44 per cent in overnight trading, marking a stunning 80-basis-point leap since the Fed cut rates in September.

The Bureau of Engraving and Printing, which prints U.S. currency
The Bureau of Engraving and Printing, which prints U.S. currencyPhoto: Harrison Keely / Wikimedia Commons, CC BY 4.0

Pricing the Red Wave

A unified Republican government removes legislative gridlock, clearing the path for the full extension of the 2017 Tax Cuts and Jobs Act, aggressive universal import tariffs, and sweeping deregulation. Bond desks moved instantly to price in higher baseline growth, stickier inflation, and an unconstrained expansion of federal borrowing. The sovereign term premium is in full revolt against prospective fiscal expansion.

The Manhattan skyline from Upper New York Bay
The Manhattan skyline from Upper New York BayPhoto: Jakub Hałun / Wikimedia Commons, CC BY 4.0

The election night sovereign bond sell-off demonstrated that fixed-income markets view a unified Republican sweep as a powerful recipe for higher inflation and endless Treasury supply.