(Bloomberg) — U.S. Treasury bonds opened weaker as investors looked to reignite the selloff sparked by Donald Trump’s presidential victory last week.
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The yield on the 10-year benchmark bond rose as much as three basis points to 4.34% in Asian trading on Tuesday. Money markets were closed on Monday due to a US holiday.
“Better economic data, perhaps an overly dovish Fed, and more policy details from the Trump administration could push Treasury yields higher,” a team of strategists at LPL Financial wrote in a note on Monday. “It will take negative economic surprises for yields to decline meaningfully from current levels.”
Treasuries collapsed on Wednesday after Trump became president, as investors ramped up expectations that policies such as tax cuts and tariffs will fuel price pressures. That reinforces the focus on inflation, just days after the Federal Reserve cut interest rates by a quarter point.
Over the weekend, Minneapolis Fed President Neel Kashkari said the U.S. economy has remained remarkably strong as the central bank made progress in curbing inflation, but the Fed was still “not quite there.” A reading of the inflation figures for October is scheduled for Wednesday.
“There’s a different landscape in terms of fiscal conditions” after the election, said Janet Rilling, senior portfolio manager and head of the Plus Fixed Income team at Allspring Global Investments. “The growth of the economy is strong. Jobs data is more clouded. Inflation is the one with the most uncertainty. The Treasury market has responded to data very efficiently.”
Traders in the swap market expect a combined quarter-point increase over the next two meetings and a 60% chance of a cut in December. One notable trade on Monday attracted attention in options tied to the Secured Overnight Financing Rate. The bet included a mild hedge aimed at two more quarter-point cuts for the December and January policy meetings.
According to George Catrambone, head of fixed income at DWS Americas, the bond market is likely to remain “influenced by the election results,” even though investors will have to “wait to see what the final policy will be.”
On Wall Street, uncertainty is forcing strategists to stick firmly to their neutral recommendations in the aftermath of the election. Strategists at Citi, JPMorgan and Morgan Stanley are all neutral on bond maturity after the election and the Fed’s latest decision.
Trump’s return to the presidency could lead to the reemergence of “bond vigilantes” if he follows through with his big spending plans, economist Nouriel Roubini said. “The market discipline will be quite fast” if Trump pushes to make his 2017 tax cuts permanent, Roubini told Bloomberg Television.
Treasury bond volumes were thin throughout the session on Monday, with trading at only about 32% of the 20-day average level through 3:30 pm New York time.
In Europe, German bonds outperformed on Monday, with cash yields lower across the curve, as money markets anticipated lower final rates from the European Central Bank amid doubts over Germany’s debt plans. Gilts were also up.
–With help from Carter Johnson and Michael Mackenzie.
(Updates with economist comments in 10th paragraph.)
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