The Bond Market vs. Untamed Inflation

Matt Rowe, head of portfolio management and cross-asset strategies at Nomura Capital Management, warns that “higher degrees of inflation are our reality moving forward.” Investors are increasingly anxious about inflation risks that haven’t yet been factored into the bond market, especially with the upcoming November 5 presidential election looming.

As of Tuesday, prediction markets showed Republican nominee Donald Trump leading Democratic nominee Kamala Harris. Despite this, the overall inflation outlook remains uncertain, regardless of who wins.

On Tuesday, inflation concerns continued, even as oil prices dropped and Treasury yields fell. The 10-year Treasury yield ended at 4.037%, reflecting a decline from recent highs. Nevertheless, bond-market volatility, as measured by the ICE BofAML MOVE Index, remains near its highest levels of the year, raising fears that inflation could surge beyond the Federal Reserve’s ability to control it.

Economists predict that Trump’s policies may result in higher inflation, interest rates, and federal deficits compared to those of Harris. However, some experts believe that inflation and economic growth could be similar regardless of the election outcome.

The nation’s growing debt, which now stands at $35.7 trillion, along with a $1.9 trillion budget deficit, is also a major factor contributing to long-term inflation concerns.

Eric Vanraes, head of fixed income at Eric Sturdza Investments, suggests that Trump’s potential victory could increase inflationary pressure on long-term interest rates. Still, the composition of Congress will play a crucial role.

If Democrats control Congress, Trump’s policies may face limitations, meaning that the balance of power in the Senate and House could have a greater impact on long-term yields than the presidential race itself.

Rowe highlights that inflation could persist due to the rising costs tied to reshoring and a more insular U.S. economy. As globalization wanes and the U.S. faces a more complex economic environment, there are limits to what interest rate policy can achieve.

The past 15 years of favorable trade and accommodative policies are coming to an end, and now inflation risks could disrupt the bond, currency, and stock markets.

Adding to inflation worries is the debate over the “neutral” rate of interest—a theoretical level that neither stimulates nor slows the economy. If the Federal Reserve cuts rates too aggressively, it could unintentionally ignite more inflation. Both Trump and Harris have outlined fiscal policies that could further strain the national debt and increase inflationary pressures.

Although inflation may ease in the short term, the outcome of the U.S. election and the makeup of Congress will play a key role in shaping long-term inflation trends and the country’s fiscal future.