Matt Rowe, head of portfolio management and cross-asset strategies at Nomura Capital Management, suggests that “higher degrees of inflation are our reality moving forward.” Investors are increasingly concerned about inflation risks that remain unaccounted for in the bond market, particularly with the upcoming November 5 presidential election.
While prediction markets currently give an edge to Republican nominee Donald Trump over Democratic nominee Vice President Kamala Harris, the inflation outlook remains uncertain regardless of the outcome.
Despite a decline in oil prices and Treasury yields on Tuesday, inflation concerns persisted. The 10-year Treasury yield closed at 4.037%, down slightly from previous highs.
However, bond-market volatility remains elevated, with the ICE BofAML MOVE Index near its highest level this year, raising questions about whether the U.S. is entering a phase where inflation could spiral beyond the Federal Reserve’s control.
Economists predict that Trump’s policies could lead to higher inflation, interest rates, and federal deficits compared to Harris. However, some believe that inflation and economic growth could remain similar no matter who wins the election.
The country’s substantial national debt of $35.7 trillion and its $1.9 trillion budget deficit are also contributing to worries about long-term inflation risks.
Eric Vanraes, head of fixed income at Eric Sturdza Investments, believes Trump’s potential victory could exert upward pressure on long-term interest rates due to inflation, though much depends on the makeup of Congress.
Vanraes notes that if the Democrats control Congress, Trump’s policies may not fully materialize, and long-term yields could be influenced more by the balance of power in the Senate and House than by the presidential race itself.
Rowe emphasizes that inflation may persist due to the rising costs associated with reshoring and the shift toward a more insular economy. As the U.S. moves away from globalization and faces a more complex economic environment, there is only so much that interest rate policy can achieve.
The era of accommodative trade and globalization has ended, and inflation risks now threaten long-term bondholders by potentially triggering selloffs in the Treasury market, impacting currency and stock markets as well.
Concerns over inflation are further complicated by debates about the “neutral” rate of interest—a level that neither stimulates nor slows down the economy. A misjudgment by the Federal Reserve in lowering rates could inadvertently fuel more inflation.
Both Trump and Harris have proposed fiscal policies that could further exacerbate the national debt and inflation pressures.
Although inflation may ease in the short term, the upcoming U.S. election, and the composition of Congress post-election, will play a critical role in shaping long-term inflation and the country’s fiscal outlook.
