USD rates made another leg higher as Trump retook the Presidency amidst what looks likely to be a Republican sweep. Markets were much more well braced this time round for a Trump victory, with 10Y UST yields selling off by almost 70bps ahead of the elections. However, this still did not prevent 30Y yields from closing at 4.60%, some 17bps higher for the day. Market participants are clearly expecting more corporate tax cuts, more deregulation, more fiscal issuances and more tariffs. While it is not clear what will eventually be delivered, control of both houses does provide Trump to deliver what he wants to. In economic terms, this may herald upside risks to growth / inflation (and our rates forecasts) at a time when the US economy is already quite resilient.
The easing cycle for the Fed has become more muddled. Between firm data and upside risks to growth, room for easing would become more constrained. Short-term USD rates are reflecting barely 100bps more of cuts, pricing in what looks like a no-landing scenario. Further out, there is also the added complication if Trump chooses to exert pressure on the Fed, keeping policy settings looser than they otherwise would have been. For long-end rates, we reckon that considerable term premium has already been embedded. There is a need to see where US yields settle in the aftermath of the elections but we are not convinced there is a lot more upside in the short term. Note that the govvie performance across the DM space is mixed. While US yields rose, EGB yields fell. There clearly are some stresses that are being felt. If Trump is perceived to be negative for Eurozone’s growth, the ECB may have to deliver more cuts to support the economy. There may well be a feedback loop, eventually dragging down UST yields in the process.
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