#MacroFriday: 10-year US treasury yield soars on Trump election

Yesterday, the Federal Reserve decided to cut its key policy rate by 25 basis points, following a 50 basis point cut in September. Since the initial rate cut, the yield on the 10-year U.S. Treasury has been climbing, resulting in a significant steepening of the yield curve and ending its inversion. The main drivers of this shift: solid economic data and Donald Trump.

Shifting momentum during the election campaign between Democratic presidential candidate Kamala Harris and Republican candidate Donald Trump led to notable changes in financial markets. When Harris' chances improved in June and July, the U.S. 10-year yield, along with the dollar, dropped. However, at the beginning of October, as Trump's presidential prospects gained traction, longer-term interest rates began to rise significantly, driven by expectations that his 'America First' policies would maintain high deficits, boost U.S. economic growth, and increase inflationary pressures.

This effect can be seen in Breakeven Inflation rates (BEI). BEI represents the difference between the yield on a nominal bond and the yield on an inflation-linked bond of the same issuer and maturity, reflecting the market's inflation expectations over the period. Since Trump's momentum began to build, the 10-year BEI has increased from 2% in September to 2.38% now. After the elections on Wednesday, annual inflation expectations for the next decade rose by 0.10%. Voters often cited the recent inflation shock as a major reason not to vote for Kamala Harris. Meanwhile, Trump's policies are expected to boost the domestic economy, but likely at the cost of rising consumer prices for Americans.