๐๐๐๐ฉ'๐จ ๐๐๐ฅ๐ฅ๐๐ฃ๐๐ฃ๐ ๐ฉ๐ค ๐ฉ๐๐ ๐๐ค๐ฃ๐ ๐ข๐๐ง๐ ๐๐ฉ?
The bond market experienced a period of turbulence in October, characterized by a sharp drop in prices and a consequent increase in yields. The yield on the 10-year U.S. Treasury exceeded 4.20%. Below, we will analyze the main factors that contributed to the movement in the bond market, with particular attention to the impact of the upcoming U.S. elections.
๐ญ) ๐๐๐ ๐๐ข๐ฅ๐๐๐ฉ ๐ค๐ ๐๐ง๐ค๐ฌ๐๐ฃ๐ ๐.๐. ๐ฅ๐ช๐๐ก๐๐ ๐๐๐๐ฉ ๐ค๐ฃ ๐๐๐ฃ๐๐ฃ๐๐๐๐ก ๐ข๐๐ง๐ ๐๐ฉ๐จ:
Both candidates for the White House are unable, or rather do not have strong intentions, to manage the public spending problem. The U.S. budget deficit grew to $ 1.833 trillion for fiscal 2024 (8% higher than in 2023), and interest on the federal debt topped $ 1 trillion for the first time. This is the third-largest federal deficit in U.S. history, following pandemic aid in 2020 and 2021. This situation results from years of expansionary fiscal policies and has important implications for financial markets. The increased supply of Treasury securities needed to finance this debt may lead to higher interest rates and greater volatility in bond markets.
Living in a period of higher interest rates
Three of the primary interest rate drivers are the Federal Reserveโs (Fedโs) policy rate, economic growth and inflation. Beginning in 2021, inflation began climbing quickly, and interest rates followed soon after. The Fed also responded to the resurgence of inflation by raising its target federal funds rate by over 5% from near zero between March 2022 and July 2023. As shown here, the yield on the benchmark 10-year Treasury note has, in recent months, traded at its highest levels since 2007.
๐ฎ) ๐๐ฃ๐๐ก๐๐ฉ๐๐ค๐ฃ: ๐ ๐๐ง๐ค๐ฌ๐๐ฃ๐ ๐ง๐๐จ๐ ๐๐ฃ ๐ฉ๐๐ ๐๐ช๐ง๐ง๐๐ฃ๐ฉ ๐๐๐ค๐ฃ๐ค๐ข๐๐ ๐จ๐๐๐ฃ๐๐ง๐๐ค
The risk of a new inflationary flare-up is increasing, fueled by several factors. The economic policies proposed by the candidates in the next elections, both Kamala and Trump, could contribute to this scenario. First of all, the increase in the public deficit as already described above. The protectionist measures announced by Trump, in addition to creating strong trade tensions with the countries involved, risk a short-term inflationary flare-up because many imported products would not be immediately replaceable with domestic U.S. products. Finally, an overly restrictive immigration policy implemented by Trump could reduce the available workforce.
Who Benefits?
Inflation makes it easier on debtors, who repay their loans with money that is less valuable than the money they borrowed. This encourages borrowing and lending, which again increases spending on all levels.
๐ฏ) ๐๐ฉ๐๐๐๐ก๐๐ฉ๐๐ค๐ฃ๐๐ง๐ฎ ๐ง๐๐จ๐ ๐๐ฃ๐ ๐๐ข๐ฅ๐ก๐๐๐๐ฉ๐๐ค๐ฃ๐จ ๐๐ค๐ง ๐ข๐ค๐ฃ๐๐ฉ๐๐ง๐ฎ ๐ฅ๐ค๐ก๐๐๐ฎ
Despite the resilience demonstrated so far, the U.S. economy may be on the verge of a slowdown. The economic policies of the next administration, whether Democratic or Republican, risk fueling the explosion, creating a dangerous cocktail of stagflation. Such a scenario would severely limit the Federal Reserve's room for maneuver, forcing it to keep rates high and thus slowing down the recovery of the bond market. The bond market is going through a period of strong volatility, where the next American elections will play a fundamental role in future movements. Even on the currency market, we have seen a strong recovery of the U.S. dollar against other major currencies. The resilience of the American market, the risks of further inflationary pressures, the American elections and the macroeconomic scenario all appear to be favorable elements for the U.S. Dollar.
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