(Bloomberg) — U.S. Treasury yields have soared — with the 30-year yield rising the most since the global flight to cash in March 2020 — as investors resumed betting that Donald Trump’s return to the White House will will stimulate inflation.
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The yield on the longest-dated U.S. Treasury bonds rose as much as 24 basis points to 4.68%, the highest level since May, and remained higher by nearly 20 basis points. Interest rates across all maturities rose at least 13 basis points at one point as traders lowered their bets on the size of Federal Reserve rate cuts in the coming year. They still expect the central bank to cut interest rates by a quarter of a point on Thursday.
An auction of 30-year Treasury bonds at 1:00 PM New York time is an additional burden on that segment of the market. Still, the interest rate movements are a vindication for those who took advantage of the so-called Trump Trade: higher rates and a steeper curve.
“The bond market is expecting stronger growth and possibly higher inflation,” said Stephen Dover, head of the Franklin Templeton Institute. “This combination could delay or even halt the Fed’s expected rate cuts.”
As investors increasingly bet that policies such as tax cuts and tariffs will fuel price pressures, the 10-year Treasury yield rose 21 basis points to 4.48%, the highest level since July, helped by a big block trade in futures. They underperformed European bonds, reflecting concerns about the impact of US tariffs on euro area export-dependent industries.
Bets on a revival in US inflation were reflected in the two-year inflation swap rate rising 20 basis points to 2.62%, the highest level since April. The price action parallels the aftermath of the 2016 election, when Trump’s victory raised inflation expectations and bonds fell.
Freya Beamish, head of macroeconomics at TS Lombard, said the biggest issue on her clients’ minds is whether the bond sell-off is just “a taste of what’s to come.”
“The question of whether Trump’s policies can generate sustained higher inflation is a question we can debate over the next five years,” Beamish said. “In short, the markets cannot fully price that story today.”
The moves also highlight concerns that Trump’s proposals will fuel the budget deficit and increase bond supply.
Wednesday’s $25 billion auction of 30-year bonds is the last of three sales of U.S. fixed-rate bonds this week. Buyers of 10-year bonds sold on Tuesday face widening losses as yields rise from the auction level of 4.347%.
Positions adjusted
For many investors digesting the election results, the frustration will be that they have been forced to abandon course at the last minute after the weekend’s polls showed US Vice President Kamala Harris gaining ground – leading to a late rise in demand for hedges. Tuesday’s price action in Treasury futures was dominated by liquidation, with open interest falling across most maturities as yields fell led by the long end.
There was frantic trading as investors adjusted their positions.
“There was tremendous volume for the overnight trading,” said Tony Farren, managing director of sales and rates trading at Mischler Financial Group, who was in the loop during the overnight trading. “It wasn’t like these movements were performed without volume.”
Yet some investors already view the rise in US yields as exaggerated. Control of the House of Representatives remained too close, with the possibility that a divided Congress would limit the Trump administration’s ability to pursue its fiscal policies.
Wednesday’s flows in Treasury futures and options include flows consistent with profit-taking on bearish bets.
“The bond sell-off has gone too far. We expect the Fed to remain on the path to lower interest rates,” said Mark Haefele, Chief Investment Officer at UBS Global Wealth Management. “The market appears to be taking a strong stance on the potential inflationary impact of Trump’s policy agenda, while there remains significant uncertainty about the extent to which it can be implemented or its actual impact on inflation.”
–With help from Liz Capo McCormick and Edward Bolingbroke.
(Adds Wednesday’s trading activity and updates return levels.)
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