10-year Treasury yield has risen with the higher probability of a Trump win
Have the Markets Decided?
Treasury yields have shifted higher this month across the curve by 40-50 basis points, as investors are pricing in a higher rate of expected inflation. In fact, the 5-year inflation breakeven rate has risen from a low of 1.9% on September 10, the day of the presidential debate, to a current high of 2.3%. As shown in the graph above, this has corresponded with an increasing probability that former President Trump wins the election per PredictIt, a prediction-related market investors use to bet on election outcomes. Statistically, this explains about 75% of the move in the 10-year yield since the beginning of September.
Why is a Trump presidency inflationary? We have outlined our thoughts regarding potential market and related economic implications in the table that follows.
AAM’s View of Market and Related Implications for the U.S. of the U.S. Election
Potential Implications
What are the risks if the market is wrong?
With the prediction market not only forecasting a Trump presidency but a Republican “sweep,” a split Congress or Harris presidency would likely result in falling US Treasury yields and a rally in equity markets outside the U.S. We would also expect the US dollar to weaken.
What sectors might be affected by a Trump Presidency or a “red wave?”
In terms of those expected to benefit, the expectation of reduced regulation would likely benefit industries like financials and fossil fuels. For example, the exporting of Liquified Natural Gas (LNG) is likely to increase. Additionally, geopolitical shifts such as enforcing Iran sanctions would have ramifications on various industries. Companies with a high degree of revenue generated domestically and/or domestically focused supply chains would likely benefit if tariffs were raised. While multi-layered, the auto industry could benefit.
Industries such as healthcare would likely be negatively affected if Democratic policies were repealed. The same for those industries benefiting from spending related to the Inflation Reduction Act. That said, much of this spending has been in “red” states. From a market perspective, the tax-exempt municipal sector would be affected if the SALT deduction were eliminated or made permanent, but more significantly, an elimination of the tax exemption would have material consequences. We view that as a tail-risk event.
Daily forecast of Probability of Senate control
Daily forecast of Probability of House control
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