As the elections draw closer, the bond market is sending important signals that many are watching closely. Both leading candidates foresee ongoing fiscal deficits, with Trump’s policies expected to be particularly stimulative for growth and inflation. But what does this mean for the bond market, and why are we hearing so much about “Bond Vigilantes” again?
Recently, we’ve seen the 10-year Treasury yield surge to 4.25%, sparking volatility across markets. Traders were caught off guard, having misjudged the Fed’s next move. Many had expected a slower pace of rate hikes, but now they’re scrambling to recalibrate their forecasts. This sell-off in bonds has led some to bring up the idea of Bond Vigilantes—investors who demand higher yields to hold US assets when they lose faith in fiscal policy. However, this narrative misses the mark.
Bond Vigilantes, in their truest form, emerge when both bond yields spike and the US dollar weakens, showing a lack of confidence in US assets. But that’s not what we’re seeing now. Instead, bond yields are rising, while the USD is actually strengthening. This signals a different story—one where traders are not fleeing US assets but adjusting their outlook on future interest rates.
The bond market is preparing for a scenario in which Trump’s policies could boost nominal growth, outpacing other economies. Investors are hedging for faster-than-expected rate hikes by using options strategies. A notable shift is the increased demand for bond puts over calls, which is unusual. Normally, investors buy bond calls as protection, but this sudden preference for puts highlights their concern over rapid rate increases, particularly around election time.
In short, this isn’t a case of Bond Vigilantes stepping in. What we’re witnessing is a recalibration of expectations, with the bond market preparing for faster growth and inflation—especially if Trump’s policies come into play. Traders are not fleeing US assets; they’re bracing for potential shifts in monetary policy that could come faster than previously anticipated.
With the upcoming US elections, the bond market is signaling key trends. Both candidates anticipate ongoing fiscal deficits, but Trump’s policies are perceived as more stimulative for growth and inflation. As a result, bond markets are reacting sharply.
The 10-year Treasury yield has surged to 4.25%, sparking discussions about “Bond Vigilantes.” This term describes investors demanding a premium to hold US assets due to inflation and policy risks. But here’s the catch: we’re not seeing true Bond Vigilantes at play.
Historically, Bond Vigilantes emerge when both bond yields rise and the USD weakens. As shown by recent data, this combination isn’t occurring. Instead, US yields are climbing, but the USD is strengthening.
What’s the bond market saying? It’s anticipating that Trump’s policies will boost nominal growth, with the US outperforming other economies. Investors are hedging for potential rapid rate hikes, evident in the options market, where demand for bond puts exceeds calls—an uncommon trend tied to election risk.
In short, no Bond Vigilantes are in play. Rather, the market is preparing for a scenario where growth and inflation accelerate, especially under Trump’s policies.
Disclaimer: Nothing here should be considered as investment advice. All investments carry risks, including possible loss of principal and fluctuation in value. Finomenon Investments LLC cannot guarantee future financial results.
