The US election results offer opportunities for retirees and other savers – as long as they put some money aside.
10-year Treasury yields BX: TMUBMUSD10Y have risen to last year’s highs in the wake of Tuesday’s vote, which gave the Republican Party control of the White House and Senate and potentially put it in control of the House of Representatives can decide. Representatives. Interest rates on inflation-protected U.S. Treasury bonds are approaching their highest levels since the 2008 global financial crisis.
The 10-year government bond yield of almost 4.7% and the inflation-proof long-term interest rate of almost 2.3% provide attractive, low-risk savings options for those looking for security and income, rather than volatile growth arising from shares.
Savers can buy these bonds directly from many brokerage firms, or they can buy a basket of bonds through mutual funds or exchange-traded funds.
A major risk is that these interest rates will continue to rise. But they are already a dramatic improvement from where they were before the polls closed on Election Day, and from September’s lows.
The yield on ten-year government bonds rose by 0.2 percentage points to 4.44% after news of the ‘red wave’ elections. Yields on inflation-protected TIPS bonds rose to 2.25% on long-term bonds, the highest level in four months.
Long-term yields rose as the market digested the fiscal and economic implications of the election victory.
“For a Treasury market that was already teetering, Trump’s victory has put additional pressure on yields, as evidenced by the historic rise in Treasury yields as Trump’s victory became clearer overnight,” said Lawrence Gillum, chief fixed income strategist at LPL Financial. said in a note to customers.
“Treasuries started to rise sharply after a Trump victory as markets recorded higher deficits and inflation,” TD Securities’ strategy team reported. “A Red Wave will likely bring about a complete renewal of the world [2017] tax cuts and some additional tax cuts. This amounts to an additional shortfall of about $5 [trillion] over the next ten years compared to the current Congressional Budget Office (CBO) baseline.
They estimate that President-elect Trump’s signature policies, including deporting large numbers of immigrants and imposing tariffs, would add an additional 1 percentage point to inflation next year and 0.3 percentage point to inflation in 2026.
Regardless of the political and economic consequences, if the government has to borrow much more money, that is expected to drive up the cost of borrowing, with the government paying higher interest rates to raise the money it needs.
Many Trump voters will hope that tax cuts will be offset by spending cuts, but the question is to what extent these can become reality. Two-thirds of the federal budget goes to Social Security, Medicare, defense, interest on debt and veterans.
This raises the question of the extent to which a Trump administration could instead embrace the financial policies known as Modern Monetary Theory and simply print the money needed to finance the deficits. This is a policy popularized by Stephanie Kelton, an economics professor at Stony Brook University and former economic adviser to Vermont independent Senator Bernie Sanders.
Doing so would require Trump to exert more direct control over the Federal Reserve once he becomes president, something he has already said he wants to do.
Not everyone is a winner from higher interest rates on U.S. Treasury bonds. The higher interest rates will increase the amount of tax money that must be spent on servicing the debt. This is already the second largest item in the federal budget, surpassing defense, Medicare and everything else.
Rising long-term interest rates are also bad news for anyone who has already invested their money in bonds. Bonds are like seesaws: as the yield, or effective interest rate, rises, the price falls. The iShares Core US Aggregate Bond exchange-traded fund AGG fell 0.8% after the election results, the iShares 7-10 Year Treasury Bond ETF IEF fell 1% and the Vanguard Extended Duration ETF EDV, which holds longer-term US Treasury bonds, tumbled . 4%.
Those concerned about the impact of inflation on their long-term bonds would be better off holding inflation-protected TIPS bonds, whose annual interest payments are effectively adjusted to reflect changes in the consumer price index.
Ordinary Americans own an estimated $5.1 trillion in bond and exchange-traded funds, plus another $1.7 trillion in hybrid stock and bond funds, according to data from the Investment Company Institute.
