Changes in political leadership often send shockwaves through financial markets, and the US Treasury is no exception. The bond market can reflect these changes in real-time as investors adjust to new political and economic developments. With a new Republican administration in control of the White House and Congress, now is the time to examine how this "red wave" influences US Treasury bonds and market dynamics.
The significance of political leadership changes on financial markets
When a new political party takes power, financial markets react like a cat discovering a cucumber—sometimes with curiosity, but often with caution. Political change brings new policies and priorities and also brings uncertainty sometimes. Although US treasury bond is considered one of the safest investments, they are still backed by the faith and credit of the US government. Any changes conveyed or determined by politics can affect all US Treasury bonds.
Comparing government policies on US Treasury bonds
The two major parties in the United States have very different attitudes toward the economy, bringing different reasons to influence the bond.
Democrats
Democratic presidents often advocate for increased government spending on social programs, infrastructure, and healthcare, potentially leading to higher budget deficits. To finance this spending, the government may issue more US treasury bonds, increasing supply and potentially raising yields.
For example, the Biden administration implemented significant fiscal stimulus measures, including the American Rescue Plan, to support the economy. While these measures aimed to stimulate growth, they also raised concerns about increased government debt and potential inflation, contributing to potentially higher bond yields[1].
Republicans
In a Republican administration, the authorities often focus on tax cuts and reducing government spending. Tax cuts can lead to increased deficits if not offset by spending reductions. The combination of tax cuts and potential increased borrowing can raise concerns about fiscal sustainability, leading to potentially higher treasury bond yields.
For instance, during President Trump’s first tenure, significant tax cuts and increased spending contributed to higher deficits and rising US government bond yields[2].
Estimating future trends of US Treasury bonds under a Republican government
Now, what can we expect? Looking back, as Trump’s policies became clearer and he won the seat, especially in Oct. and Nov. 2024, the yield of US treasury bonds went up, especially in Medium-term and long-term yields[3]. The US10Y even reached over 4.4% at the moment the Republican Party could win the White House, the House, and the Senate[4].
So, in the future US Treasury market, we would see:
Possible better yield
Market participants might anticipate potential higher bond yields, driven by concerns about fiscal policy, increased government borrowing, and the potential tax cuts stipulated in Trump’s second term[5].
Volatile market
While the treasury bonds would potentially yield higher, the expansive fiscal policies would also bring more inflationary pressures. Plus, plans to limit the Federal Reserve’s independence, such as allowing the president to directly set interest rates and subjecting the Fed to oversight from the Office of Management and Budget, could enhance the unpredictability of monetary policies and bring more risks to the US treasury bond market.
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Political tides may ebb and flow, but US government bonds are still the bedrock of many investment portfolios. From shifts in economic theory to changes in taxation to spending, staying informed is key to making your way through these waters.
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Reference
[1].Available at: https://www.cmegroup.com/education/featured-reports/four-questions-about-the-american-rescue-plan-act-of-2021.html?utm_source=chatgpt.com
[2].Available at: https://abcnews.go.com/Business/trumps-economic-legacy/story?id=74760051
[3].Available at: https://www.reuters.com/breakingviews/donald-trump-will-meet-his-match-bond-markets-2024-12-18/
[4].Available at: https://www.cnbc.com/quotes/US10Y
[5].Available at: https://www.cbsnews.com/news/trump-tax-cuts-brackets-salt-tax-child-tax-credit-2025/
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