Long-term Treasuries rise as markets reassess ‘Trump deal’ after Biden withdrawal

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Longer-term Treasury yields edged lower on Monday following Joe Biden’s decision to drop out of the U.S. presidential race, as investors reassessed the “Trump trade” positions they had built up over the past few weeks.

As markets opened on news that Biden would not seek re-election, the yield on the benchmark 10-year note fell 0.03 percentage point to 4.21 percent, while shorter-dated yields rose. The moves marked a modest reversal of the steepening yield curve that had been fueled by expectations of a second term for Donald Trump. The dollar fell 0.1 percent against a basket of rival currencies in a muted market reaction to Biden’s announcement.

“Over the next few weeks, I think there will be more noise than signal to the market about what’s going on on the political side,” said Ray Attrill, global co-head of foreign exchange strategy at National Australia Bank in Sydney. “Does that mean economics will dominate? I don’t know. I think it’s all leading to a little more hesitation in the market than it has been over the past month or so.”

Growing confidence in a Trump victory, which Rabobank’s Stefan Koopman said would likely lead to “deregulation, tax cuts and increased fiscal spending,” has in recent weeks boosted safe-haven assets including gold and bitcoin as traders price in a higher likelihood of crypto-friendly policies, rising geopolitical tensions and stronger inflation in the United States.

Koopman, whose “base case” remains a Trump victory in November, said small early Monday moves in the prices of both assets — bitcoin rose 0.8 percent while gold fell 0.1 percent — showed investors were still cautious about unwinding newly built positions.

Prediction markets showed Trump’s odds of winning fell slightly on Sunday when Biden formally endorsed Vice President Kamala Harris.

In recent weeks, investors have added to a bet that Treasury yields could pay off if tariffs and Trump’s tax cut plan eventually lead to higher inflation. That trade — the so-called steepening yield curve — could also pay off if lower near-term inflation prompts the Federal Reserve to cut interest rates in the coming months.

Some of the steeper bets on Monday morning were reversed, with the yield curve at its flattest in more than a week.

In a note to clients, Stuart Kaiser, head of US equity trading strategy at Citigroup, said Biden’s decision to step down would be “a headwind for Trump’s trades” and “add an uncertainty premium to the [Democratic National Convention] days in August and shift the odds back closer to our 50/50 “base case” for the election outcome.

S&P 500 futures rose 0.7 percent before Wall Street opened. Nasdaq futures rose 1.1 percent, with big tech stocks expected to rebound from last week’s losses. European shares also rebounded after a series of daily declines, with the Stoxx Europe 600 up 1.2 percent.

In Asia, the Nikkei 225 fell 1.2 percent. Traders said the 1.1 percent drop in South Korea’s Kospi and 0.5 percent drop in Australia’s S&P/ASX 200 could be the impact of funds trimming positions built up in recent weeks around expectations of a clear Trump victory.

In Japan, defense stocks such as Mitsubishi Heavy, IHI and Japan Steel Works recently surged to multi-year highs on bets that a Trump victory and an era of U.S. isolation would force allies like Tokyo to spend more on military equipment. Those same stocks fell sharply on Monday, with shipbuilder IHI leading the declines with a 3.9 percent drop.

Trump’s frequent calls for tariffs to protect US manufacturers have made some investors nervous about companies that could be affected, but have also provided an incentive for Asian corporations with strong manufacturing bases in the US.

“The bigger picture is that investors probably still see Trump as having the advantage, so in terms of markets, this is not a big change in the story. Asian markets will definitely be influenced a lot by the ‘mother market’ in the US,” said Takeo Kamai, head of execution services at CLSA Securities in Tokyo.