Why Investors in U.S. Treasury Bonds Should Be Concerned About a Potential Trump Victory, Explains DWS

With an impressive EUR 896 billion in assets under management as of 31 December 2023, DWS Group’s influence spans continents, drawing from over 60 years of financial expertise. The firm is lauded for its excellence in Germany, Europe, the Americas, and Asia, serving as a trusted partner for integrated investment solutions, known for its stability and innovative approach across various investment disciplines.

As the November US presidential election draws near, DWS has voiced concerns that are resonating with investors, especially those with interests in US government Treasury bonds. The potential for Donald Trump’s re-election is a source of market unease, DWS notes, despite the election being nine months away and Trump’s Republican nomination not yet fully confirmed. DWS recalls the aftermath of Trump’s 2016 victory when yields on ten-year government bonds surged from about 1.80% to nearly 2.65% by mid-December, in what was the steepest rise in seven years, coinciding with the Federal Reserve’s initial stages of raising interest rates.

DWS highlights the risk that the dynamics which previously led to a sharp increase in the yield on ten-year U.S. Treasuries could be reactivated by Trump’s potential presidency. The term premium, which reflects the bond market’s risk assessment over the bond’s term, might escalate. DWS points out Trump’s limited but significant policy proposals, such as imposing a 10% tariff on all imports and maintaining the 2017 tax cuts, as inflationary measures that, combined with Trump’s first-term precedents, suggest higher yields could ensue if he were re-elected.

Navigating through what DWS describes as “difficult waters,” the Treasury market faces challenges that extend beyond domestic policy. DWS raises the issue of who will purchase the substantial volume of new bonds required to fund the government’s planned expenditures. With geopolitical tensions as a backdrop, DWS expresses concern over the potential withdrawal of key international buyers and the looming high bond maturities requiring significant refinancing in the near future.

DWS remains cautious about attributing any market reactions directly to the early Republican primary results, considering the complex array of factors influencing the markets. However, DWS suggests that if market sentiment has already adjusted to the possibility of Trump’s victory, leading to higher yields and a stronger dollar, the actual outcome of the election might not provoke as dramatic a response. Nonetheless, DWS firmly believes that the prospect of Trump’s return is likely to be viewed as an increased risk by the majority of market participants, both before and after the election—a perspective DWS deems entirely justified.

On 8 February 2024, Rick Santelli, CNBC correspondent, delivered an insightful analysis regarding the recent developments in the bond market while appearing on CNBC’s program “The Exchange.”

In his report, Santelli provided a recap of the week’s bond auctions, focusing particularly on the final auction involving the sale of $25 billion worth of 30-year Treasury bonds. This auction concluded a total of $121 billion in coupon supply spanning three different maturities: 3-year, 10-year, and 30-year bonds.

Highlighting the auction results, Santelli noted that the 30-year bond auction achieved a yield of 4.36%. He underscored its success by explaining that it met expectations closely, even “stopped through” by two basis points, indicating it sold at a slightly lower yield than anticipated, which is advantageous for the seller—in this instance, the government.

Examining the bid metrics, Santelli observed that the bid-to-cover ratio matched the average of the last ten auctions, signaling healthy demand. While indirect bidder participation was the highest since June of the prior year, direct bidder participation hit its lowest point since August 2020, indicating a decline in purchases from domestic institutions such as pension funds and hedge funds.

In terms of dealers’ participation, they acquired a slightly higher percentage of the bonds compared to the average of the last ten auctions.

Despite the positive outcome of the auction, Santelli cautioned about a crucial market indicator: the high yield close for 30-year bonds in 2024, standing at 4.41% at that time. He suggested that approaching this yield level again could prompt selling activity despite the favorable auction results.

In a recent conversation with Maria Bartiromo on Fox Business’s “Mornings With Maria,” Trump shared his insights on a range of topics, from his critique of current economic strategies to the risks posed by artificial intelligence (AI). Expected to secure the Republican nomination for the 2024 presidential race, Trump did not shy away from critiquing the Biden administration, the Federal Reserve, his opposition to Central Bank Digital Currencies (CBDCs), and his unsettling encounter with a deepfake video.

Trump lambasted the Biden administration’s economic policies, particularly its emphasis on transitioning to electric vehicles (EVs). He labeled the push as unrealistic, pointing to the high costs and limited range of EVs, as well as the reliance on China for essential materials. Trump championed the idea of offering consumers a choice among internal combustion, hybrid, and electric vehicles, without government interference.

On immigration, Trump contrasted his administration’s stringent border policies with what he perceives as Biden’s lax approach, which he argues has allowed millions to enter the country. He described a potential continuation of Biden’s term as disastrous, dubbing him “incompetent” and “the worst president in our country’s history.”

Trump questioned Federal Reserve Chairman Jay Powell’s capability to manage the economy’s soft landing, suggesting Powell might reduce interest rates to favor the Democratic Party in the forthcoming elections. He warned of potential inflation spikes, particularly if Middle Eastern conflicts impact oil prices, and criticized Powell for being politically motivated. Trump indicated he would not reappoint Powell if he were to return to office, alluding to alternative candidates for the Fed Chair without specifying anyone.

Trump reiterated his opposition to CBDCs, arguing they could lead to increased surveillance and the risk of individuals finding their accounts depleted. He coupled this with concerns over AI advancements, sharing an experience where AI was used to falsely attribute an endorsement to him, underscoring the challenge in distinguishing real from fake content. Trump called for immediate action to mitigate AI’s security threats, pointing out the potential for misinformation and conflict due to the technology’s evolving capabilities.

Trump’s stance against CBDCs, first voiced at a New Hampshire campaign event on January 18, aligns with his broader economic and political views, resonating strongly with his conservative base. He has positioned himself as a defender against government overreach, particularly emphasizing the threats CBDCs pose to personal financial autonomy.

On January 18, Trump declared his commitment to preventing the establishment of a CBDC, arguing it would grant the federal government total control over personal finances, enabling them to seize funds unnoticed.

CBDCs, representing the digital form of a country’s official currency and regulated by its central bank, contrast with the decentralized nature of cryptocurrencies. They aim to enhance transactional efficiency, security, and accessibility.

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