Donald Trump's victory and inflation are priced into bond prices

Financial giants from Goldman Sachs & Co. to Morgan Stanley and Barclays Plc. are taking a fresh look at the impact a Donald Trump victory in November could have on the bond market.

After last week's debate hurt President Joe Biden's reelection chances, Wall Street strategists are urging clients to position for persistent inflation and higher long-term bond yields.

At Morgan Stanley, strategists including Matthew Hornbach and Guneet Dhingra argued in a weekend note that now is the time to bet on higher long-term interest rates relative to short-term ones.

Trump's rise in the polls since Thursday's debate means investors should consider economic policies that could lead to further rate cuts from the Federal Reserve, as well as a Republican victory that would lead to fiscal expansion and push up long-term bond yields, Morgan Stanley said.

Barclays believes the best response to the growing prospect of a Trump victory is to hedge against inflation. Strategists Michael Pond and Jonathan Hill wrote Friday that the clearest expression is a bet that five-year Treasury inflation-protected securities, or TIPS, will outperform standard five-year bonds.

Buyer investors like Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, are increasingly taking notice.

McIntyre said he worries bond advocates are reacting too early to the controversy. The odds of a Republican victory in November will increase because of Biden's performance, weaker data and higher oil prices.

U.S. Treasuries fell Monday, pushing yields to their highest levels in more than a week, in what traders said was continued fallout from last week's surge in chances of a second Trump term.

Treasuries extended their losses after the Supreme Court ruled in a case that will limit the chances of Trump being tried before the November election for trying to overturn the results of the 2020 election.

The rise in Treasury yields was driven by longer maturities, with the 30-year bond rising more than eight basis points to 4.65%, its highest level since May 31.

Not everyone on Wall Street is convinced that higher long-term Treasury yields and steeper curves are inevitable.

While the risk-premia-driven decline in U.S. interest rates has been the consensus view on how U.S. yields should respond to a Republican victory, we see a case for a flattening of risk, Goldman Sachs strategists led by George Cole and William Marshall wrote after the debate. They see investors’ focus shifting away from fiscal spending to the risks of higher tariffs, which are likely to weigh on productivity and growth as the election approaches.

With the makeup of Congress after November uncertain, assumptions about how Trump's policies will impact markets are tenuous, said Kathy Jones, chief fixed-income strategist at Charles Schwab.

The biggest risk to the Treasury market is probably a change in the rhetoric about policy after the election, Jones told Bloomberg Television on Monday. I just think it’s too early. Presidential candidates can say a lot of things on the campaign trail, but they have to get those things through Congress.

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