Bond traders forecast no US recession — plus a Trump victory

Good morning! Packed edition today breaking down everything you want to know about what the bond market is forecasting about the economy, monetary policy, and the election.

Here we go.

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The future, according to the bond market

Names like Nvidia and Tesla make the US stock market fun to talk about, but the Treasury market is roughly $10 trillion larger and arguably tells a more reliable story for where the economy is heading.   

Bond traders have indeed had a busy month.

Two-year and 10-year yields have climbed 41 and 50 basis points, respectively, since the Federal Reserve made its jumbo rate cut on September 18.

“The economic data suggests the economy isn’t crashing,” Ira Jersey , the chief US interest rate strategist for Bloomberg Intelligence , told me.

“The bond market has priced out the near-term risk of a recession.”

On Tuesday, yields on 10-year notes touched their highest point since July, while those on 2-year notes rose to a two-month high.

Generally, rising bond yields reflect expectations for a stronger economy — and recent retail sales, jobs, and inflation numbers all support a soft landing. 

In effect, traders are pulling back on their bets for Fed rate cuts. A few weeks ago, markets saw the central bank cutting its terminal rate to around 3% by the end of 2025. 

Now those forecasts hover closer to 3.5%.

For the November 7 Fed meeting, markets see a quarter-point cut as a shoe-in.

“There’s basically been a 75-basis-point turnaround in what the market is pricing for how much the Fed is cutting,” Jersey said. “That’s why bonds have sold off.”

The impact of politics

Over recent weeks, prediction markets like Kalshi have shown steadily improving odds for a second Donald Trump presidency. 

As Opening Bell Daily has reported, those rising odds have coincided with climbing stocks and bond yields, given Wall Street’s view that Trump would be better for equities than bonds.

As of Tuesday, Kalshi gives Trump a 60-40 advantage over Kamala Harris.

“There’s this market narrative that suggests with Trump, you’ll have more pro-growth activities, increased inflation and deficits, certain tax cuts, pro-corporate policies that will cause 10-year yields to be higher,” Bloomberg Intelligence’s Jersey said. 

It’s also possible, he added, Trump would appoint new leaders in the central bank that are more dovish than Jerome Powell & Co., which could also lead to lower interest rates.  

When I asked Jersey how much election expectations have influenced Treasury markets, he said there is at least an “optical correlation” between rising Trump odds and rising bond yields.

“The election does have some impact,” Jersey said. “My guess is somewhere between 25% to 40%, and macro accounts for the rest.”

Thoughts or feedback? Leave a comment below.

Elsewhere:

📉The S&P 500 stumbled. In fact, the index saw its first back-to-back losing days since September this week. Trading has looked choppy as the outlook for Fed rate cuts has turned less aggressive. That said, the VIX — Wall Street’s fear gauge — remains muted.

🚗 Tesla earnings are due. The EV maker reports earnings Wednesday, and if history is any indication then the stock should swing dramatically before and after the announcement. For earnings per share, Wall Street is looking for 60 cents, up from 52 cents the prior quarter but less than the 66 cents seen a year ago. (Barron’s)

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