Investors Cautioned on Rising US Treasury Yields

BCA Research analysts warn investors about the recent rise in US Treasury yields, linking it more to shifts in political sentiment than to economic fundamentals.

Key Insights

• Political Factors at Play: The rise in yields is largely attributed to the increasing likelihood of a Donald Trump victory in next month’s US election, as noted by shifts in betting markets and polling data.
• Initial Economic Indicators: While initial economic data supported the rise of the 10-year Treasury yield from 3.65% to just above 4.00%, the jump to 4.20% happened without a clear economic cause.
• Expectations of Trump's Policies: The surge in yields reflects market expectations about Trump’s potential return to the White House, with anticipated tariffs likely to exert deflationary pressures on the economy.

Recommendations

• Cautious Outlook Post-Election: BCA advises against betting on persistently high yields after the election. They suggest that any increases could provide opportunities to invest in longer-duration bonds, anticipating lower yields in 2025.
• Investment Strategy: The firm recommends maintaining cyclical positions with above-benchmark portfolio duration and utilizing Treasury curve steepener positions.
• Tactical Positioning in Fed Funds Futures: Investors are encouraged to consider a tactical position in June 2025 fed funds futures, as varying outcomes of the elections could influence yields. A Harris victory may lead to lower yields, while a Trump presidency might not significantly change the Fed's current policies.

Conclusion

BCA concluded that any rise in bond yields near the election should be seen as a buying opportunity.