Fiscal concerns about a second Trump presidency won’t overshadow the easing cycle

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Global investors are growing more confident that former President Trump will reclaim the US presidency this November, with his prospects strengthened by both the failed assassination attempt and President Biden’s campaign struggles. This has put a renewed focus on likely policies in a second Trump term, including a pledge to extend tax cuts and levy higher import tariffs on China.

A second Trump presidency could indeed result in higher fiscal deficits, renewed inflation, and some upward pressure on yields. But the Trump trade itself is not necessarily about higher rates across the curve, but instead underperformance from the long end. Since the pre-debate close on 27 June, two-year yields have come down around 29 basis points, 10-year yields have declined 11bps, and 30-year yields have fallen 2bps.

Looking ahead, we anticipate US rates and government bond yields will broadly continue to decline and suggest investors act now to put cash to work:

Federal Reserve policy will be driven by inflation and labor conditions, not fiscal deficits. Fed Chair Jerome Powell this week made clear that the US fiscal deficit, while a concern “over time,” is outside the Fed’s mandate. Instead, Powell reiterated the Fed remains focused on reining in inflation, and that the latest three data points “do add somewhat to confidence” on progress. Other Fed speakers this week have echoed this sentiment, with San Francisco Fed President Mary Daly saying “confidence is growing” in reaching the 2% target, and Fed Governor Adriana Kugler noting she’s “cautiously optimistic.” We continue to expect the first Fed cut in September.

This means the attractive starting yield from quality fixed income is unlikely to last for much longer. With the Fed likely to join the global rate-cutting cycle soon, we believe US bond yields will fall. The 10-year US Treasury yield is currently trading in the upper range of the past five years, providing a favorable chance for investors to lock in rates that could offer ample buffer against ongoing volatility and attractive portfolio returns as yields fall. We see scope for significant capital appreciation as markets start to price deeper rate cuts into next year, or in the event of a growth shock.

Bonds have historically outperformed cash over the long term while offering diversification benefits. Cash looks set to deliver progressively lower returns as central banks continue on their easing paths. Historically, the probability of US bonds outperforming cash rises with longer holding periods—from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively. In addition, we note that high-quality bonds are among the safest investments in an investor’s portfolio, as they can preserve capital, reduce equity volatility, and stabilize portfolios.

So, we remain most preferred on fixed income in our global portfolios. We recommend investors position for rate cuts by buying quality bonds, implementing bond ladders, and holding diversified fixed income positions with satellite exposure to riskier credits to improve overall portfolio yields. This also applies to sustainable investments into green, social, and sustainable bonds, as well as those issued by multilateral development banks.