It turns out I’m not the only one connecting these dots. On Sept. 23, Goldman Sachs Group Inc. strategists Praveen Korapaty and Avisha Thakkar wrote that a clear victory by Biden, plus Democratic control of the House and Senate, is the scenario that would boost 10-year Treasury yields the most — potentially by 30 to 40 basis points over the following month. Short-end traders might start to bet the next Fed rate increase would come in 2023, rather than 2025, they said.
Recalibrating Fed expectations from 2025 to 2023 might not seem like much, but it’s a big deal for the $20 trillion U.S. Treasury market, which has been mired in a narrow range for months. The ICE Bank of America MOVE Index, which measures bond-market volatility, fell to a record low on Sept. 29, the day of the first presidential debate. As Bloomberg News’s Katherine Greifeld and Emily Barrett noted recently, the gauge tracks one-month options from two-year notes to 30-year bonds, which means it reflects the Fed’s influence at the front end. If two-, three- or five-year yields became unstuck, that would suddenly make Treasuries across the curve much more interesting — not to mention push back against all the hand-wringing over bonds no longer serving as a reliable hedge for stock-market declines.
To be clear, this scenario for Treasuries remains highly speculative. First, Americans have to actually cast their ballots in line with current polling averages. Then, elected officials need to pass effective legislation that will boost the economy and support the millions of people who remain jobless. And finally, that fiscal relief must make its way into inflation, which is notoriously complex, to encourage the Fed to tighten monetary policy. Those are a lot of “ifs.”
Still, with several states already in the process of early voting, traders appear ready to position in earnest for not just what happens on Election Day, but for the implications over the coming years. For now, at least, the bond market is betting on a blue wave.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.