Treasury yields surge as investors bet on Trump victory

If you're still wondering who’s poised for a win in November, you might want to ask the bond market.

Since June 27th, the day of the first presidential debate between Donald Trump and Joe Biden, the 10-year Treasury yield has jumped by one-tenth of a percentage point.

What's striking about the recent rate surge is that it's come in the face of "squishy soft" inflation data, said David Rosenberg, president of Rosenberg Research, in a recent analysis.

The telling shift suggests investors are starting to price in the growing odds of not just a Trump victory but a full-on Republican sweep.

"This is all about bond investors beginning to price in the possibility that not only will Donald Trump emerge victorious but that the GOP will take the House and Senate too," wrote Rosenberg.

Is Trump a recipe for inflation, round two?

While Trump has always clamored for rock-bottom rates, investors are betting his policies in a second term would push borrowing costs higher.

The former president has vowed to slap steep tariffs on Chinese imports, a move that would likely boost inflation. He's also pledged to slash the corporate tax rate again and extend expiring individual tax cuts.

According to Rosenberg, these proposals would balloon the deficit and force the Treasury to ramp up borrowing, which is especially concerning in the current economic environment.

"Trump's tariff policy this time seems to be far more extensive than in his prior terms and, as such, investors are nervous about what that means for inflation," Rosenberg noted.

We all pay a price with higher treasury yields

When Treasury yields rise, borrowing becomes more expensive for everyone. Mortgages, car loans, credit card rates, and student loans all tend to move in lockstep with Treasuries.

That means a spike in Treasury yields can quickly translate into higher financing costs for households and businesses alike.

Yields also reflect investor expectations about future government borrowing. When deficits and debt levels are expected to rise, investors demand higher yields to compensate for the increased supply of bonds.

That’s precisely what the market seems to be anticipating under a second Trump term.

Rosenberg notes that neither Trump nor Biden has offered a plan to rein in the nation's sky-high deficits.

"Both parties want more stimulus, just with different constituents who would benefit (high-income earners and businesses under Trump; students and low/middle-income cohorts under Biden)," he wrote.

"There was nothing in the debate that would have given anyone hope that sky-high fiscal deficits would come to an end anytime soon."

For now, the bond market seems to be sending a clear signal: prepare for the possibility of rising inflation and higher debt levels under a second Trump term.

The only question is whether the economy can handle the potential rate shock that comes with it.