Market Minute: You Don't Need Trump to Explain Bonds

The biggest move in the market right now is the 10-year Treasury yield breaking out from a 6-month downtrend. A lot of people find this surprising, considering the Fed cut rates by a big amount just a little more than a month ago. Naturally when people can't explain a move in the market, they look for outside forces to fill the narrative gap, and in this case, some are arguing a Trump victory is the reason yields are up. 

It's not necessary. The move in bonds is perfectly explainable from a purely market perspective. If you overlay a chart of Trump's odds of winning according to prediction markets, there's some marginal overlap the last few weeks, but this looks more like coincidence, considering the charts were significantly disconnected at the time the 10-year yield bottomed out. This is the most important point on the chart because it's when everything in the bond market changed. 

Of course, that was the exact day the Fed cut 50 bps. Prior to that, long-term yields had been falling, and the yield curve bull steepened as the market priced in a slowing economy that needed a boost from the Fed. When that boost came in larger than expected, bonds turned on a dime and did the exact opposite: bear steepening. That effective stimulus put the bottom in for yields, and then U.S. economic data went on a hot streak, crushing bearish expectations again. The U.S. economic surprise rate flipped back positive and surged past the rest of the world. 

To be sure, there is likely some volatility lingering in the market on the risk of a contested election. So, if odds do skew in any direction hard enough, vol should drop and in theory bonds sell off. But the fact there's still a very obvious election "kink" in the VIX curve is more evidence that bonds are not moving on politics. Bonds are moving because the Fed was proactive in its support for the economy, and once again, market participants were just too pessimistic on the outlook.