U.S. Treasury bond yields significantly rose on July 1 (local time), the first day of the second half of the year. The forecast of a Republican overwhelm in the upcoming U.S. Presidential and mid-term Congressional elections on November 5 has boosted bond yields. As former Republican President Donald Trump has promised substantial tax cuts, the U.S. general government deficit is expected to efflux. This would lead to a radical rise in bond issuance, raising expectations that government bond yields would rise significantly as they move more inversely to prices. The benchmark 10-year U.S. Treasury bond yield jumped 0.128% from last weekend to 4.47%.
The long-term interest rate benchmark, the 30-year Treasury bond yield, also rose 0.13% to 4.632%. Meanwhile, the short-term interest rate benchmark, the 2-year Treasury bond yield, which is sensitive to market expectations for the Federal Reserve’s interest rate policy, remained stable. The 2-year yield recorded a slight increase of 0.04% to 4.578%. The Wall Street Journal (WSJ) reported that bond yields surged substantially due to growing expectations for a Republican victory in the upcoming Presidential election in November and a perceptible defeat of the Democrats in the Congressional elections.
On the night of June 27, the race for the presidency was very close with President Joe Biden and Trump in a neck-and-neck competition. During a TV debate, some of the audience noticed that Biden showed signs of stuttering and confusion. In the U.S., the dominant opinion was that Trump was leading 2-1, and among Democratic supporters, there were loud calls for a change in the presidential candidate from Biden to other candidates. Expectations of a Democratic loss in this election were reinforced when Biden reaffirmed his intention to complete the presidential race through a family meeting.
The market expects that the fiscal deficit will increase if one party, whether Republican or Democratic, controls both houses of Congress and the White House. This is because the deficit will increase significantly without a brake on the budget. The heightened deficit will have to be filled by issuing national bonds. As a result, more bonds will flood the market, bond prices will fall due to the increased supply, and bond yields are expected to rise dramatically.
Trump has pledged to make the corporate tax cuts introduced during his first term permanent and to implement massive tax cuts for the wealthy if he is re-elected next year, resulting in predictions of a substantial increase in the fiscal deficit. Above all, bond investors expect the U.S. fiscal deficit to snowball if the Republicans oust the Democrats in the November mid-term elections and seize control of both houses of Congress, eliminating any Congressional checks and balances.
