A specialist trader works inside a post on the floor at the New York Stock Exchange on Oct. 23, 2024.
Brendan McDermid | Reuters
Treasury yields rose in overnight trading as investors weighed the early results from the tight presidential race between Vice President Kamala Harris and former President Donald Trump.
The 10-year Treasury yield jumped 14 basis points at 4.431%, hitting its highest level since July 2. The yield on the 2-year Treasury was up by 8 basis points to 4.285%, reaching its highest level since July 31. One basis point is equivalent to 0.01%. Yields and prices have an inverted relationship.
Traders speculated the early returns were favoring the former president. NBC News projected that Trump had won a key victory in North Carolina and Georgia, but other swing states like Pennsylvania are still too close to call. NBC News also projected Republicans are expected to regain their majority control of the U.S. Senate in 2025.
The general thinking on Wall Street ahead of the election was that bond yields could see a big pop in the event of a Trump win, and they could surge in a Republican sweep, where the party captures control of Congress and the White House. That is because Republicans may introduce tax cuts and steep tariffs, moves that could widen the fiscal deficit and reignite inflation.
“If there’s a Republican sweep of House, Senate and the presidency, I expect the bond market to be wobbly,” Jeremy Siegel, finance professor at the Wharton School of the University of Pennsylvania, said on CNBC’s “Squawk Box” on Tuesday. “I expect them to be worried that Trump would enact all those tax cuts, and I think bond yields would rise.”
Neither Trump nor Harris really promised fiscal discipline on the campaign trail, raising worries that investors will demand higher yields in exchange for holding Treasuries as the government is forced to issue more and more debt to fund its ballooning spending.
“Bonds are selling off across the yield curve massively as the Trump trade gets applied again,” wrote Byron Anderson, head of fixed income at Laffer Tengler Investments. “We see markets expecting a Trump victory and a real possibility of a Republican sweep.”
The yield can be expected to approach 4.5% in the event of a Trump win, or fall toward 4% under a Harris victory, according to Stephanie Roth, chief economist at Wolfe Research.
A Harris administration with a divided Congress may prompt bond yields to retreat.
“I think a split Congress, whoever wins the presidency, is probably the favorite for the markets, so that neither candidate can get his or her full plan pushed through,” Siegel said.
The benchmark 10-year Treasury yield surged 50 basis points in October, marking the biggest monthly increase since September 2022.
On Thursday, the Federal Reserve will make its next decision on interest rates and is widely expected to slash rates by a quarter point.
“Investors are clearly thinking that Trump’s going to run away with this thing here,” said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs. “I would expect tomorrow you’re going to see, if these trends hold and Trump holds on, … interest rates move pretty significantly higher to the upside.”
— CNBC’s Alex Harring and Sarah Min contributed reporting.