- Long-dated Treasury yields soared after the presidential debate last Thursday.
- The moves indicate the bond market reacting to a higher probability of a Trump presidency, Ed Yardeni said.
- Moves in nominal and real yields indicate forecasts of higher inflation and stronger growth, he noted.
The world's biggest financial market is swaying after Thursday's presidential debate, as the odds of a second Donald Trump presidency jumped among forecasters.
US Treasury yields surged and prices dropped following the first debate, indicating investors are starting to price in a Trump victory in November, market veteran Ed Yardeni wrote in a note.
"The 10-year Treasury yield rose from 4.29% on Thursday afternoon to 4.48% today, the highest level since May 31," he wrote on Monday.
"That was in spite of the lowest y/y print for the personal consumption expenditures deflator since March 2021 on Friday," he added, referring to the Federal Reserve's preferred inflation gauge, which showed pricing pressures easing last month.
Yields are rising chiefly on the long-dated end of the curve. It's a sign that investors' long-term expectations for the economy may have shifted, Yardeni said, even as the interest rate outlook remains stable.
At the same time, climbing yields on Treasury Inflation Protection Securities indicate upside in real yields. 10-year TIPS gained 14 basis points since Thursday, he said.
"We think markets see a potential mix of stronger economic growth, higher inflation, and more Treasury supply in the event Trump wins," Yardeni explained.
The spike in yields could partially be explained by deficit concerns, as economics experts say a second Trump presidency would likely widen the federal deficit by up to $5 trillion through the coming decade, Yardeni added.
The Republican candidate has pledged to extend individual and estate tax cuts he introduced in his first term, which are set to expire next year.
As bond traders are sensitive to high levels of government debt, unchecked deficit spending could prompt market "vigilantes" to stop buying US bonds and send yields soaring, Yardeni has repeatedly warned.
"Perhaps the bond market is overreacting since much can change between now and November's presidential election. But that's not to say that other financial markets won't follow suit, pricing in the rising probability of a Trump win as well," Yardeni said.
After the debate, odds that Trump would be elected in November grew to 57% from 52%, according to cited data from PredictIt. Biden's odds fell to 31%.
