What are the most common "Trump deals"?
For this topic, investors from different fields may have different answers - US stock investors will blurt out the names of numerous financial, energy, and healthcare stocks, foreign exchange traders will support the strong US dollar, and even cryptocurrency players will once again "speculate" on virtual currencies such as Bitcoin
However, in terms of the safest deal at the moment, I believe many people will still focus on the US bond market. In fact, as we mentioned last week, whether it's the Federal Reserve cutting interest rates or Trump taking office, there is one type of transaction that is destined to be the winner - betting on a steepening US bond yield curve.
The first step under the steepening curve is undoubtedly to end the historic inversion of US bond yields over the past two years.
This scene was clearly reflected on Monday of this week - the momentum brought by the soaring probability of Trump winning the election quickly put pressure on long-term US bonds overnight, pushing up long-term bond yields. The market's calculation is that Trump's tax cuts and tariff hikes will stimulate inflation and worsen the US fiscal situation, especially if the Republican Party sweeps Congress.
This also brings returns to investors who bet that the "unusual situation" of short-term bond yields exceeding long-term bonds will return to normal.
Market data shows that except for a slight drop in the yield of two-year treasury bond bonds, the yield of other maturities of US bonds basically closed higher overnight. Among them, the yield of 2-year US Treasury bonds fell 0.2 basis points to 4.464%, the yield of 5-year US Treasury bonds rose 2.6 basis points to 4.14%, the yield of 10-year US Treasury bonds rose 4.4 basis points to 4.236%, and the yield of 30-year US Treasury bonds rose 6 basis points to 4.465%.
Note: Trends in bond yields across different maturities, with orange representing 30-year US Treasury yields
It is worth noting that the yield of 30-year US Treasury bonds exceeded that of 2-year Treasury bonds for the first time since January 31st on Monday, ending the long-term inversion of the curve.
At the same time, the inversion degree of the 2-year/10-year yield curve, which has attracted the most attention in the industry, has also significantly narrowed - the inversion degree between the two narrowed to -23 basis points overnight, the smallest inversion degree since January.
In the past two years, the US bond market has been stuck in the so-called upside down state of the yield curve that indicates economic recession for a long time - that is, the yield of medium and short-term treasury bond such as two-year notes is "abnormally" higher than the yield of long-term treasury bond such as 10-year notes. According to the data of Dow Jones Market Data Company, since July 5, 2022, the yield of two-year treasury bond bonds and 10-year treasury bond bonds has been "inverted", and the duration of this "inverted" phenomenon has also set a record after May 1, 1980.
Many people have been betting for almost the same amount of time that the upside down situation will reverse, but in the end, it has repeatedly backfired. But now, the situation seems to have finally changed.
Many investors expect a potential second Trump administration term to feature tariffs and tax cuts, which could reignite inflation. Cindy Beaulieu, Chief Investment Officer of Conning North America, recently stated that the yield curve caused by inflation and fiscal policy may continue to steep.
Steven Englander, a strategist at Standard Chartered Bank in New York, pointed out that considering investors' previous experiences in short selling bond trades, they may want to ensure that the Trump trade becomes the dominant trade before shorting fixed income assets again. The steep curve trading has not performed very well for some time, but it has performed very well this month. And once it starts moving, it often actually starts moving.
He predicted that the interest rate gap between two-year US bonds and 30-year treasury bond would be decisively corrected from now on, and eventually expand by as much as 200 basis points.
Of course, whether trading with a steepening yield curve or an end to the inverted state can achieve more "victories" in the future will also depend on the Federal Reserve. In the second half of this year, it is necessary for the Federal Reserve to initiate interest rate cuts as soon as possible in order for this trade to truly hold its ground - loose monetary policy should lay the foundation for a sustained decline in the short end of the yield curve.
At least from the current situation, the development of all situations is clearly optimistic.
Federal Reserve Chairman Powell once again revealed a more dovish side in his latest speech on Monday. Powell stated that the economic data for the second quarter has given decision-makers more confidence in moving towards a sustainable 2% inflation target. His statement may pave the way for the Federal Reserve to cut interest rates in the near future.
A noteworthy phenomenon is that traders have increased their bets on the Federal Reserve cutting interest rates three times this year, following Goldman Sachs' latest statement that there is a "solid reason" for the Fed to cut interest rates in July. At present, the market has fully digested the expectation of two interest rate cuts of 25 basis points each in 2024. The possibility of a third interest rate cut implied by the swap contract also reached around 60% on Monday.
Vineer Bhansali, founder of LongTail Alpha, an asset management company based in Newport Beach, California, has been increasing his bets on steepening yield curves recently. He said, "I think Powell really wants to cut interest rates now, which is the driving force behind the front-end (yield decline). As for the back-end, the market seems to think that almost no one can compete with Trump now