Elections and the Bond Market

Nov 3, 2020

Now that Election Day is here, many investors are wondering what the outcome will mean for the bond market. There are many major policy decisions that will influence the outlook—trade, energy, taxes and budget deficits, and pandemic relief. However, it’s difficult to assess how these issues will be addressed post-election, and even more unpredictable how the market will react.

Consequently, we would avoid making any major changes to fixed income portfolios based on the elections, but we will be keeping a close eye on the fiscal stimulus talks because those have the potential to have the biggest influence on the bond market. In general, we believe it’s likely that some sort of fiscal aid package will be passed after the election, but the size, timing and specifics are up in the air. To some extent, the upward trend in long-term bond yields over the past few months and steeper yield curve suggest that the market has already begun to price in some improvement in the economy during 2021.

Treasury yields are lower, but the curve is steeper

Instead of focusing too closely on the uncertainties ahead, we suggest focusing on the factors that we can assess with some certainty. Federal Reserve policy is one of those factors. The Fed has indicated very clearly that it a) will keep its policy rate near zero until inflation rises and/or the unemployment rate returns to pre-pandemic levels; b) has put in place programs and facilities to help support markets; and c) is planning to continue its bond-buying program.

With the Fed anchoring the federal funds rate near zero and expanding its balance sheet, our view is that interest rates are likely to remain lower for longer. There may be a modest rise in 10-year Treasury yields toward the 1% region on the back of a fiscal stimulus package, but it will likely be limited by ongoing low inflation and Fed policies.