There are indications the "Trump trade" has commenced, BCA Research says

Investing.com -- US Treasury yields have touched three-month highs as traders gauge the path ahead for Federal Reserve interest rate policy this year and assess the potential outcomes of the US presidential election.

By 08:38 ET (12:38 GMT) on Wednesday, the yield on the benchmark US 10-year Treasury note had risen by 0.04 percentage points to 4.246%, adding on to a string of recent gains since the Fed slashed its key federal funds rate by 50 basis points to range of 4.75% to 5% in September.

Immediately after the Fed's jumbo reduction, traders were pricing in as much as a full percentage point in further drawdowns by January. However, strong recent economic data and deficit concerns have led investors to temper these expectations, with markets now seeing closer to a half-point in cuts.

Yields, which typically move inversely to prices, have subsequently sold off, pushing the dollar up to multi-month peaks and weighing on other currencies like the euro and yen.

In a note to clients this week, analysts at BCA Research said the re-emergence of the so-called "Trump trade" has also fueled the jump in yields so far this week.

Prediction markets like Kalshi and PredictIt show Trump is now the clear favorite to win the US presidential election on Nov. 5. However, these bets have received some scrutiny because they have diverged from national polling averages, which suggest that Trump's Democratic rival Kamala Harris holds a narrow advantage with only weeks of campaigning left.

Crucially, both candidates are all but tied in several key battleground states that are tipped to have a heavy impact on the election.

A victory for Trump, who has called for tax cuts, looser financial rules and sweeping tariffs, could drive inflation higher and mean US rates may not fall as quickly as initially anticipated, analysts have said.

"US bond yields are rising, the US bond term premium is widening, the US dollar is strengthening, and US small caps are trying to break out. These dynamics might last a few months if Trump is reelected," the BCA Research analysts wrote.

They also argued that a "red sweep" scenario -- in which Trump wins the presidency and Republicans gain control of both houses of Congress -- would "raise considerable uncertainty" around the outlooks for inflation, public debt, and monetary policy.

"This warrants a higher risk premium on US bonds, i.e., a wider term premium," they said, adding that, outside of the US, emerging-market exchange rates will depreciate and fixed-income markets will "suffer" over the coming months.

Source: Investing.com