Bond markets have proven far more affected by the ebbs and flows of this year's nail-biting presidential election, with volatility gauges tied to the world's biggest slice of the global financial system testing multiyear highs and benchmark Treasury yields swinging wildly into the final days of a bitter autumn campaign.
While stocks certainly have recently shown signs of investor uncertainty, they've largely plowed higher since Vice President Kamala Harris replaced President Joe Biden at the top of the Democratic Party ticket in late July, save for a week of historic volatility tied to events in Japan in early August.
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In fact, the S&P 500 has risen more than 10% since that yen-linked volatility spike shook global markets.
And it notched only a modest 1.37% decline last week after a mixed set of mega-cap tech results and some mildly hot inflation data, even as polls continue to indicate a dead heat, with some 11th-hour momentum for Harris into the final stretch.
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"Equity investors have maintained a bullish narrative anchored to an economic soft landing, achievement of the Fed’s inflation mandate, and thus a regular rate-cutting cycle, and a Republican sweep of the White House and Congress, while further assuming that the earnings growth rate will eventually accelerate to double digits," said Lisa Shalett, chief investment officer and head of the global investment office at Morgan Stanley Wealth Management.
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Bond markets, however, have whipsawed in a way that has unsettled investors worldwide.
Benchmark 10-year note yields, the very scaffolding of global financial markets, have risen an unprecedented 80 basis points in the face of not only an outsized half-point Federal Reserve interest-rate cut but also signals of an aggressive path of follow-on reductions from Chairman Jerome Powell and his colleagues.
U.S. Bonds on the (volatility) MOVE
The Merrill Lynch Option Volatility Estimate, otherwise known as the MOVE index and the bond market's key volatility gauge has soared more than 43% to the highest levels in more than a year since the late September Fed cut and data suggesting former Trump's lead in swing-state polls.
Traders have cited a combination of better-than-expected economic data, including a flash third-quarter GDP estimate of 2.8%, modestly quickening inflation pressures, and rate cuts in key markets around the world as contributing to the bond market selloff.
Others have noted that markets have been pricing in the impact of various pledges from the former president — including tax cuts, spending plans and tariff strategies — that are likely to both stoke near-term inflation pressure and add billions to already bloated debt and deficit tallies.
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"We've joined the chorus of voices suggesting that the rise in long-term yields likely has more to do with the higher odds of a [Republican] sweep over the last couple of weeks," said Lauren Goodwin, economist and chief market strategist at New York Life Investments.
"The logic is that a sweep in either direction opens the door to higher deficit spending and therefore higher growth, inflation, rates, and higher risk," she added.
Investors may also be forgiven for baking in the influence of Trump's comments last year that suggested a U.S. default "could be maybe nothing," resulting in little more than a "bad week or a bad day" for global investors.
Few others would see it that way.
U.S. Treasurys: Global market center of gravity
"The US Treasury market is the center of gravity for global markets, and the world can’t afford a weak treasury market, which not only weakens bond markets globally but can drive uncertainty and volatility in equity markets as well because it impacts stock valuations," said John Hardy, chief macro strategist at Saxo Bank.
That puts a huge amount of responsibility on whoever wins the White House this week and, of course, on the lawmakers who ultimately comprise both houses of Congress to get a firmer grip on the path of the nation's debt, which is bumping into a $36 trillion debt ceiling, and settle the bond market's recent bout of nerves.
"Interest rates are critical to follow for all investors when they are flashing red as they are now," Hardy said, noting that massive cuts to government spending, as suggested by Trump's highest-profile advocate, Elon Musk, could lower the deficit but "tank the economy."
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Allowing the Fed, which could find itself under new leadership in a Trump presidency, to intervene with larger bond purchases or lower interest rates "could blast the US dollar lower and worsen inflation."
"The bond market will be priority number one for markets and for the incoming president if it doesn’t shape up post-election," Hardy said.
Monday's early moves have benchmark 10-year notes falling by around 10 basis points, a normally significant move but one that now seems less likely to boost broader sentiment, to around 4.281%.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, fell 0.6% to 103.653, which suggests some unwinding of the so-called Trump Trade heading into Tuesday's vote.
The bond market's larger concerns, however, with respect to growth, inflation and a buyers' strike in U.S. debt auctions, haven't gone away.
Nor has the likelihood of a contested election or a protracted vote count that will drag the ultimate decision as to who occupies the well into November and possibly beyond.
Contested election likely
"Trump has a path to victory through the Electoral College, not the popular vote, which limits his odds," said Matt Gertken, chief U.S. political strategist at BCA Research.
"A contested election is likely," he cautioned, not that "the Supreme Court is more likely to intervene than in 2020 due to changes in electoral law. A Republican sweep should cause more volatility. Democratic gridlock is next most likely but benign for stocks in the short run."
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Glenmede's Jason Pride, however, said that while stock market volatility should pick up over the coming days and into the vote count itself, it will "ultimately settle out once the results become clear," given that both candidates have "very different visions for economically sensitive issues like taxes and tariffs."
"The bottom line for markets is the presidential election may lead to near-term uncertainty, but that uncertainty should fade as the results are reported and the policy priorities (as well as the congressional latitude the president-elect will enjoy) will come further into focus,' Pride said.
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