Rising bond yields hit stocks as US election looms; $48bn wiped

Rising bond yields hit the stock market as betting markets now show Donald Trump is more likely to win the Presidential election early next month.

In the past five weeks US Treasury bond yields have soared from 3.6 per cent. Photo by SPENCER PLATT / Getty Images via AFP

With two weeks to go the US election is fast becoming the biggest issue for markets.

As Donald Trump rebounds in opinion polls and betting markets, investors look to be making room for the possibility of bigger US budget deficits, trade wars and significant shifts in foreign policy.

In the past five weeks US Treasury bond yields have soared from 3.6 per cent to 4.6 per cent amid US economic “exceptionalism” which has damped hopes of further aggressive interest rate cuts.

But rising support for Trump also looks to be a factor behind the rise in bond yields.

RealClearPolitics Betting Average had Trump at 60 per cent versus 38.6 per cent for Harris.

Five weeks ago it had Trump at 45.7 per cent and Harris at 52.7 per cent.

As the US 10-year Treasury yield jumped 11 basis points to 4.2 per cent on Monday, all sectors of the US share market except tech lost ground after a seven-month winning streak.

Nvidia soared to a record high amid rising expectations of a strong earnings beat next month.

The Australian sharemarket, which lacks exposure to big tech giants, proved more vulnerable.

In its worst day in seven weeks, the S&P/ASX 200 dived 1.7 per cent to 8205.7 points.

A day after its second-highest close on record the local share market lost $48bn in value.

Property, health care and infrastructure stocks were in the firing line as Australia’s 10-year bond yield soared 15 basis points to a three-and-a-half month high of 4.42 per cent.

“Treasuries sold off on Monday as political uncertainty remains the defining market theme ahead of Election Day in just two short weeks,” said BMO Capital Head of Rates Strategy, Ian Lyngen.

“As investors continue to debate whether Trump or Harris is more likely to win the majority of the electoral votes, it strikes us that there remains a conceivable path to victory for each candidate as the campaign focus has shifted toward swing states and undecided voters in the final leg of the race.

“While Trump appears to be the favourite in the betting market, conviction around election trades can only go so high in light of the margin of error in the polls and the potential for distortions in prediction market pricing.”

But the US election was now the most pressing and immediate macro concern”, albeit partly due to the proximity to the event – even if the election results may not be known for weeks.

Lyngen said there was also widespread assumption that the new President will be content to allow the deficit to continue growing unchecked even without a sweep of Congress.

“Deficit spending will persist even in the absence of a sweep, although having the opposing party control either the Senate or the House would presumably present a meaningful hurdle to even more dramatic deficit spending programs,” he said.

Still, Donald Trump has vowed to extend corporate and personal tax cuts due to expire in 2025.

“While a Trump victory wouldn’t necessarily be met with a solid rally in risk assets, a GOP sweep would most likely be viewed positively by the equity market. Hence, the apprehension that investors in the Treasury market are grappling with at the moment,” Lyngen added.

The US dollar may also be benefitting from the Trump effect.

While hard to separate the effect on the US dollar of rising bond yields, the greenback has soared about 2.7 per cent since the betting odds began to turn in Trump’s favour five weeks ago.

“Tariff policy would be unhindered in the event of a Trump win and a unified government would likely mean larger tax cuts and deficits,” said Citi’s Global Head of Macro Asset Allocation, Dirk Willer. He noted that non-US dollar currencies fell until 4-5 days before the 202 election.

Asian currencies ex-China, the euro, Mexican peso and Chilean peso were “attractive to short.”

“While we think that the next two weeks will still be driven by this hedging demand, also because Trump seems to have some momentum in the polls, we think many shorter-term focused clients may not be willing to take the event risk, as the presidential race is still close to 50-50.

He said profit taking may start a week or so before the election, especially for trades where the macro story is not that supportive. Meanwhile the price of gold is hitting record highs despite a rising US dollar.

Spot gold hit a record high of $US2,740.59 on Monday.

RBC Capital Markets Head of Global Commodity Strategy, Helma Croft, said her recent meetings in Washington with senior officials from the previous Trump administration indicated there could be “significant shifts on foreign policy if the 45th president returns to office.”

Policy pivots on Russia and Iran could have implications for energy markets, with the former possibly securing a measure of sanctions relief and the latter facing a new raft of coercive measures.

“Though a number of Senate Republicans, including Sen. Lindsey Graham (R-SC), continue to call for supporting Ukraine, there is a clear opposing view within Trump’s inner foreign policy circle on the efficacy of pouring so many resources into a war that they view as unwinnable,” Croft said.

“Hence, these advisors insist that a key priority of Trump 2.0 would be to push for a peace settlement as soon as possible, even if it entails allowing Russia to consolidate its territorial gains.

She said it will also be important to watch whether cracks emerge in the collective European resolve to support Ukraine if there is a clear US policy pivot on the war.

But Iran could find itself the principal target of US sanctions in a change of power scenario.

“The officials we spoke with were adamant that the maximum pressure policies will be making a return, and reducing Iranian oil revenue will be a top agenda for President Trump,” Croft added.

“Unlike the case of Russia, where there are some splits within the party, we do not envision any GOP resistance to curtailing Iranian oil exports.

“We were also struck by the expressions of enthusiasm for an Israeli strike on Iranian nuclear facilities. Some of the well-placed former officials we spoke with stated that Prime Minister Netanyahu is facing a historic opportunity to erode the Iranian nuclear threat and reset the Middle East chessboard, given the elimination of the top ranks of Hezbollah and Hamas.

They suggested that if the Israelis take a pass at this stage as part of a deal with the Biden administration, Israel could pursue such a goal early in 2025 if Trump returns to office.

“President Trump certainly showed no enthusiasm for foreign military entanglements during his previous time in power,” said Croft. “However, we do take seriously the potential for him to support more aggressive Israeli action, including targeting nuclear facilities, given the views of some of his closest advisors, as well as with where the broader GOP stands on this issue.”