Yields soar as likely Trump win stirs ‘bond vigilantes’

US Treasury Yields — The benchmark 10-year Treasury yield rose by as much as 18 basis points to 4.471%, its highest since July. (GettyImages pic)

SINGAPORE: US Treasuries dropped today, sending yields surging, as Donald Trump stood on the cusp of a second presidency that could usher in tax cuts and tariff hikes that boost the deficit and inflation.

Republican former president Trump claimed victory in the 2024 presidential contest after Fox News projected that he had defeated Democrat Kamala Harris in a stunning political comeback four years after he left the White House.

The benchmark 10-year Treasury yield US10YT=RR rose as much as 18 basis points to 4.471%, its highest since July, as polls also showed Republicans winning control of the Senate and a close race for the House of Representatives.

The yield, which moves inversely to the price, was last up 13 bps at 4.422%, on track for its biggest one-day rise in a month.

Tax cuts would widen budget deficits and increase government borrowing while tariffs are expected to stoke inflation and reduce the Federal Reserve (Fed)’s scope to cut interest rates.

“We need to watch what happens to bond yields, and there could be a tipping point if US bond yields continue to rise,” said Seema Shah, chief global strategist for Principal Asset Management.

“The bond vigilantes are out,” she said, referring to investors dumping government debt over worries about higher borrowing.

The yield on the 30-year Treasury note US30YT=RR last traded 17 bps higher at 4.619%.

That was its highest since early July and set for its biggest one-day rise since June 2022, hinting at concerns about future borrowing.

Trump was on the verge of victory at 4.30am ET after capturing the battleground states of Pennsylvania, North Carolina and Georgia and holding leads in the other four, according to Edison Research.

Treasury yields surged once it became clear Trump had considerably improved on his 2020 election performance against Joe Biden.

The two-year yield US2YT=RR peaked at 4.312%, its highest since August, and last traded roughly 5 bps higher at 4.249%.

How much of Trump’s tax cut plan will make it through Congress ultimately depends on whether the Republicans achieve a clean sweep. Close House races could take days to call.

US budget deficits and government debt levels were projected to surge under either candidate in the election, according to several estimates, although Harris was expected to add less debt than Trump.

The Fed kicks off its two-day monetary policy meeting today and is expected to deliver another 25-basis-point rate cut, though future decisions look less certain.

Traders have reacted to the election results by trimming bets on Fed cuts next year, with rates seen staying above 4% until May 2025 FEDWATCH.

“I start to worry when yields cross the 4.50% mark,” said Matt Orton, chief market strategist at Raymond James Investment Management.

“If we don’t reverse that upward trend, I would be more reticent to add too much more risk until we hear from the Fed or get a little bit more guidance with respect to where terminal rates might lie.”

European bond yields, meanwhile, fell as investors increased their bets on rate cuts from the European Central Bank, given Trump’s plans for tariffs on China and Europe could hurt the euro zone economy.

Germany’s 2-year bond yield DE2YT=RR, which is sensitive to ECB rate expectations, was last down 9 bps at 2.208%.

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