Stock Market Surges and Bonds Plunge with Trump’s Election Victory: Here’s Why

On Wednesday, as Donald Trump was declared the winner of the presidential election, the stock market experienced a significant surge.

While stocks climbed, the bond market took a dip in response.

The stock market hit record levels on Wednesday following the announcement of Trump’s victory, which seemed to alleviate the uncertainty surrounding the election. Economists suggested this might also reflect a level of confidence in Trump’s economic policies.

That same day, the yield on 10-year Treasury bonds escalated to 4.479%, marking a four-month peak. An increase in bond yield indicates a downturn in the bond market, as bond prices decrease when yields go up.

Stock traders celebrated the gains, whereas bond traders expressed concerns over Trump’s economic strategies.

Trump’s campaign was heavily based on promises to maintain low tax rates and to impose substantial tariffs on imported goods.

Economists Anticipate Increasing Deficit Under Trump

Experts are cautioning that Trump’s intentions to sustain and expand tax cuts could exacerbate the federal budget deficit, currently at $1.8 trillion. Additionally, proposed tariffs could trigger inflation, an issue the Federal Reserve has been striving to control.

For those investing in bonds, these concerns suggest an expectation of higher yields. The yield represents the interest rate, or the return investors anticipate for lending their money, in this instance to the federal government.

Jonathan Lee, a senior portfolio manager at U.S. Bank, pointed out that bond investors might see higher risks in holding U.S. debt without a clear plan to curb spending, which is currently lacking.

Regarded as a standard in the bond market, the yield on 10-year Treasury bonds started to rise weeks before the election as investors predicted a Trump victory, The New York Times noted. “On Wednesday, the yield on 10-year Treasury notes spiked by as much as 0.2 percentage points, a substantial movement for that market,” the report added.

Interestingly, bond yields increased at a time when other interest rates generally move together.

However, on Thursday, the Federal Reserve lowered interest rates, cutting the benchmark federal funds rate by a quarter of a point. This move was anticipated and primarily affects the short-term bond market more than the long-term.

Long-term bond yields are on the rise as “many investors believe that the federal government under Trump will continue high deficit spending,” according to Bankrate, a personal finance website.

Analysts Expect Continuation of Tax Cuts with Trump

Many analysts foresee Trump and a Republican-controlled Congress renewing the 2017 Tax Cuts and Jobs Act, which reduced tax rates broadly and contributed to the federal deficit during Trump’s first term.

“Significant expenditures by the Biden administration, especially for COVID-19 relief, have further increased that debt,” Bankrate reports. Now, bond traders predict a continued rise in the deficit under Trump.

Todd Jablonski, global head of multi-asset investing at Principal Asset Management, voiced a broader concern that the U.S. has been living beyond its means for a long time. Over the long haul, Jablonski said, investors “are concerned that the creditworthiness of the United States might not be as solid as previously perceived.”

As the federal deficit grows, the risk to investors increases, and they demand higher interest rates for lending money to the government.

During their campaigns, neither Trump nor Democratic presidential candidate Kamala Harris presented a compelling plan to reduce the deficit, economists noted. Harris proposed increasing taxes on the wealthiest Americans and corporations to generate new revenue.

Trump, on the other hand, committed to further deepening his tax cuts, arguing that economic growth and job creation would naturally increase revenue.

The bond market, however, remains skeptical.

“If there’s a Republican sweep of the House, Senate, and the presidency, I expect the bond market to be shaky,” Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, told CNBC on Election Day. “They are likely to be worried that Trump would implement all those tax cuts, and I think bond yields would rise.”