It's been all-in on the Trump trade Wednesday morning on Wall Street after former President Donald Trump clinched an electoral win that will see his return to the White House next year.
Stocks, bitcoin (BTCUSD) and other risk assets were surging, while the selloff in longer-dated bonds intensified as investors worried that a second Trump administration could be bad news for the already large U.S. deficit and could potentially rekindle inflation.
The 2-year Treasury yield BX:TMUBMUSD02Y was up eight basis points to 4.28%, while the benchmark 10-year rate BX:TMUBMUSD10Y surged 17 basis points to 4.45%, according to FactSet. Bond prices and yields move in the opposite direction, while higher yields push up borrowing costs for the U.S. government, companies and households.
"These are the trades that had been building" ahead of the election, George Catrambone, DWS Group head of Americas fixed income and head of trading, said in an interview with MarketWatch. But now it also includes those who doubted a Trump victory or investors waiting for clear election results, he said.
Even so, Catrambone still sees buy opportunities, particularly in the spike in the policy-sensitive 2-year Treasury yield, given expectations for the Federal Reserve to cut rates at its meeting on Thursday, which should pull the rate lower.
The elephant in the room, however, will be whether the "bond vigilantes" - investors who threaten to keep upward pressure bond yields based on policies they don't like - like deficit spending. That puts the 10-year Treasury yield in particular focus, given the anxiety it caused about cracking the economy when it hit a peak of 5% a little more than a year ago. The focus then was on inflation fears that might force the Fed to keep rates higher for longer.
Related: 10-year Treasury yield crosses 'line in the sand' that begins to spell trouble for stocks
"But it's really early," Catrambone said. "We are in the opening salvos of what this is going to mean from a markets perspective."
He also expects more clarity over the next few months to separate "fact from fiction as to what will actually happen" on the policy front under a second Trump term.
Election outcome bad for bonds?
Bond investors have been taking advantage lately of historically higher yields available in fixed income after the Fed started lifting rates from a near-zero pandemic range.
On the flip side, many investors also endured a historically bad stretch for fixed income when an inflation surge and a pivot to rate hikes in 2022 pummeled bond portfolios.
"These election results will be really bad for fixed income and can unwind a lot of the bullishness in fixed income," Andrzej Skiba, head of BlueBay U.S. fixed income at RBC Global Asset Management, said in emailed comments on Wednesday.
"Trump keeps openly telling people that he will increase tariffs not just on China but with every trade partner. We're talking 10% tariffs across all global partners. This is a big deal because this could add 1% to inflation. If you add 1% to next year's inflation numbers, we should say bye to rate cuts."
Goldman Sachs research analysts on Wednesday put together a chart showing their odds of Trump's outlined tariffs being applied to China, Mexico, the European Union and globally.
Marko Papic, chief strategist at BCA Research, said the bond market's powerful reaction to the Trump win could help temper his agenda of additional tax cuts and tariffs.
"We believe that President Trump's administration will have to moderate many of their fiscal priorities," Papic said in emailed comments.
The Dow Jones Industrial Average DJIA was surging 1,300 points, or 3.1%, Wednesday, while the S&P 500 index SPX was 1.9% higher and the Nasdaq Composite Index COMP was up 2.1%, according to FactSet.
-Joy Wiltermuth
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