The U.S. Treasury market has reached a size of $28 trillion and has recently seemed increasingly influenced by political factors. Treasury yields, which are an important driver of economic borrowing costs, have traditionally been influenced by short-term rate adjustments by the Federal Reserve. However, lately, the U.S. election results and Trump's choice of Besant as Treasury Secretary have become the main drivers of Treasury yield fluctuations.
Post-Election Volatility
After Trump's election, the Dow Jones Industrial Average rose sharply and the S&P 500 reached a record high. However, the U.S. Treasury market was initially under pressure following Trump's victory. It was not until Besant was nominated as Treasury Secretary that market sentiment began to rebound. Besant is seen as a "safe pair of hands" to counterbalance Trump's populist policies. Investors expect him to effectively push for tax cuts and maintain prudent fiscal spending, which has had a positive impact on the Treasury market.
Inflation and Employment: Key Factors for Treasury Yields
As of last week, the benchmark 10-year U.S. Treasury yield was 4.15%, still within the range it has fluctuated since the end of 2022. Recently, following the release of economic data, Treasury yields have shown marked volatility, but the influence of inflation data on yields has gradually weakened, with employment data becoming more important. A strong October employment report once boosted yields, although the latest non-farm data was somewhat weak, the market reaction was relatively mild.
The Dominant Role of Political Factors
Compared to traditional economic data, political factors have increasingly impacted Treasury fluctuations. Trump's policies, including deportation, increased tariffs, and lower corporate tax rates, once sparked expectations of a sell-off in Treasuries. However, after Besant's nomination, market sentiment reversed. Besant is seen as being able to balance Trump's populist tendencies and facilitate the implementation of tax cuts, with the market full of confidence in the stability of policies he will bring.
Future Outlook: Rising Yields and Risk Premiums
Although the Federal Reserve has started a rate-cutting cycle, Treasury yields have been rising since September. The market expects future rate cuts to be less than previously anticipated, which has also pushed up Treasury yields. Rising yields mean higher borrowing costs for businesses and consumers but also reflect market confidence in a strong economic recovery.
More potentially risky is the rise in the term premium of Treasuries, especially as Treasury yields reflect future interest rate expectations while also being influenced by uncertain factors like long-term inflation outlooks. Before and after the election, the term premium surged sharply, but after Besant's nomination, this trend slowed, indicating a more optimistic market expectation for future economic and fiscal policies.
Overall, political factors, particularly Trump's policy choices and Besant's fiscal policy inclinations, have profoundly influenced the future trajectory of the U.S. Treasury market.
