The US election’s impact on fixed income markets
With uncertainty shrouding the upcoming US election, fixed income experts weigh in on how a Republican or Democratic presidency may affect bond markets and interest rates.
Following US President Joe Biden’s withdrawal from the 2024 presidential election on 21 July, experts continue to assess the impact of a presidency led by either Republican Party nominee Donald Trump or presumptive Democratic Party nominee Kamala Harris.
In particular, experts in the world of fixed income have analysed how both outcomes will affect the asset class and interest rate outlooks.
According to Althea Spinozzi, Saxo head of fixed income strategy, bond markets typically remain stable under both parties and show neither consistent gains or losses directly tied to the president’s party.
In the event of a Democratic win, Spinozzi said: “US treasuries might experience stable yields. Democratic presidencies often pursue policies that maintain economic stability, which could result in modest changes in interest rates and a balanced performance in the bond markets.”
On the flip side, a Republican win could potentially see more varied performance for US treasuries, she added.
“While safe-haven demand might increase, leading to stable or slightly lower yields, economic policies that boost growth might also result in a higher neutral interest rate, which could put pressure on long-term treasuries.”
Paul Mielczarski, head of global macro strategy at Franklin Templeton-owned fixed income manager Brandywine Global, also weighed in on the conversation.
He explained: “In the event of a deeper slowdown in growth or a large sell-off in risky assets, bonds offer an attractive asymmetry and portfolio protection. We believe that any bond market sell-off resulting from a Republican clean sweep in November would be short-lived. The extension of Trump’s 2017 tax cuts is already expected by investors.”
Mielczarski added that the firm is preferring US agency mortgage-backed securities, which offer attractive spreads with more defensive portfolio characteristics.
Contrasting Spinozzi’s more neutral stance, Michael Medeiros, macro strategist at Wellington Management, expects a more divided impact on bond markets.
“Elections are enormously important, particularly as it relates to fiscal policy. From a bond market perspective, even midterm elections are critical. The bond bear markets of 1994, 2018, and 2022 ended within a week or so of the midterm elections, and all three of those elections represented shifts from full control by one party to divided government. Bond markets tend to love divided government and hate full control because of the fiscal implications,” he explained.
The US election could be a “very binary event” for bond markets and interest rate outlooks in 2025 and 2026, the macro strategist said.
“I’d expect a Trump victory and a Republican sweep to bring higher interest rates – perhaps 6 per cent within six months – and a Harris victory and a Democratic sweep to bring lower interest rates.”
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Jasmine Siljic
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