US bond traders are betting a Trump election win will push interest rates higher as both candidates propose big defict spending

Long-term interest rates have been rising over the past month as bond traders brace for an increase in US government debt after next week’s election, particularly if Donald Trump wins a second term.

Many investors are betting the value of bonds will fall during a Trump presidency, as his policies could boost inflation and interest rates, a move that has been dubbed the Trump Trade.

Jason Wong, a rates strategist at BNZ, said the odds of Trump winning and the Republican Party achieving a clean sweep had been rising. This would give Trump the authority needed to cut taxes and raise import tariffs, which may push interest rates higher and boost the US dollar.

David Croy, an interest rate strategist at ANZ, said 10-year bond yields had climbed about 50 basis points over the past month. This increase was largely due to economic data showing the US Federal Reserve was on track for a “soft landing,” having brought inflation back to target. 

However, Croy said the move also reflected some market positioning ahead of the election next Tuesday.

“The market has taken the view that both sides may run expansionary fiscal policy and that will contribute to bond issuance, and that's driving yields higher,” he said.

This trend has been putting upward pressure on long-term mortgage and term deposit rates in New Zealand, though it has had little effect on six-month or two-year rates, which are more closely linked to the Official Cash Rate.

Jarrod Kerr, chief economist at Kiwibank, said the US 10-year rate had risen from just over 3.6% to 4.25%, which also lifted New Zealand’s five- and 10-year rates. 

“Most of this increase is driven by economic fundamentals; I’d say the move from 4% to 4.25% is more election-driven. Trump’s policies are inflationary, and so too are [Kamala] Harris’s,” Kerr said.

Budget watchdog barks

However, recent research by the Committee for a Responsible Federal Budget found Trump’s plan would result in a much higher deficit than Harris’s. Established by two retiring senators from both parties in 1980, the group scrutinises spending proposals and advocates for lower public debt.

The Committee criticised both candidates for proposing 2024 plans that “would likely further increase deficits and debt above levels projected under current law.” 

According to its central estimates, Vice President Harris’s plan would increase the debt by $3.95 trillion through 2035, while President Trump’s would add $7.75 trillion.

The range for Trump’s debt increase was estimated to be $1.7 trillion to $15.6 trillion, while Harris’s range was between $300 billion and $8.3 trillion. Harris’s plan would push debt to 134% of GDP (gross domestic product) by 2035, while Trump’s policies would see it rise to 143%, up from today’s 99%.

While the polls suggest a close race for the White House, prediction markets now give Trump a stronger chance than Harris. For example, Polymarket gave Trump a 66% chance of winning on Wednesday afternoon, while FiveThirtyEight’s poll-based model estimated a 53% chance.

Nate Silver, a polling expert and Polymarket advisor, cautioned that despite the tight polls, a “relatively decisive win for one of the candidates” could still happen. 

However, he noted that this might not necessarily be Trump, as pollsters have adjusted methods to better capture his supporters after lessons learned from 2016.