We are now less than two months away from the US presidential election. The outcome is highly uncertain, as the two candidates are currently neck and neck in the polls.
The summer's events, including Joe Biden's health issues, a poor debate by the incumbent president, an assassination attempt on Donald Trump and Kamala Harris's nomination, have created uncertainty in what was expected to be a 2020 election remake.
Yet, the agenda of the two candidates is radically different and the upcoming election could alter the course of the US economy for years to come. Uncertainty will likely fuel volatility in financial markets in the weeks ahead of 5 November. Bond markets will need to adjust to the impact of new policies amid slowing economic growth, rising public deficits and the Federal Reserve's rate cuts.
Let's look at the main issues at stake in this campaign and the potential impact of the election on bond investments.
The Federal Reserve will lead, but fiscal policies will set the tone
The Federal Reserve's monetary policy and the broader economic trajectory will remain the key drivers of bond market performance in the coming years.
A Harris presidency would likely result in strong support for environmental, social and governance (ESG) investments and more stable trade relations, which could help contain inflation risks.
Conversely, a Trump presidency might drive higher inflation, a stronger dollar and greater market volatility, particularly for emerging markets and sectors exposed to global trade.
In either case, investors will need to closely monitor the Fed's policy and broader economic trends, as these factors will have the largest impact on bond markets in 2025 and beyond.
Government bonds: Fed’s role in the yield curve
The 2024 election will have implications for government bonds, but the Fed’s rate cut cycle will be the dominant force. The key question remains whether the US economy can avoid recession and achieve a soft landing. However, the election's outcome will shape fiscal policies that could add pressure on long-term rates.
Harris as president would likely continue the current administration’s approach, with increased spending on infrastructure, renewable energy and social programs. This could result in higher government debt issuance and upward pressure on long-term yields.
Should inflation remain moderate, the Fed's expected rate cuts could flatten the short end of the yield curve, but higher debt levels could keep long-term yields elevated.
Harris’s focus on moderate trade policies could help contain inflationary risks, stabilising bond markets to an extent.
On the other hand, Trump in office would likely set a more aggressive fiscal expansion through significant tax cuts and higher defence spending, accompanied by tariffs. These policies could heighten inflationary risks, limiting the Fed’s capacity for aggressive rate cuts.
Under this scenario, the yield curve could steepen further, with long-term yields rising more sharply due to higher inflation expectations. Fiscal expansion and potential trade disruptions from tariffs could exacerbate inflation, pushing yields higher as investors demand more compensation for risk.
Regardless of the election outcome, a steepening of the yield curve appears likely. The trajectory of US debt and fiscal deficits will continue to weigh on long-maturity bonds, limiting the potential for significant declines in long-term interest rates. A hard landing for the economy could temporarily push long-term yields lower, but structural pressures from deficits will persist.
Corporate bonds: Fiscal policy and profitability
The corporate bond market is especially sensitive to fiscal and regulatory shifts that will differ significantly depending on the election’s outcome. However, the broader economic outlook and the Fed's rate cuts will remain crucial in shaping borrowing costs and credit spreads.
A Harris administration may introduce higher corporate taxes and stricter regulations, particularly in sectors such as healthcare, technology and finance. These measures could weigh on corporate profitability, potentially widening credit spreads as investors seek greater compensation for increased risk.
However, Harris’s dedicated support for sustainability and green energy initiatives could benefit the ESG bond market, with government incentives likely spurring increased issuance of green bonds and narrowing spreads in sectors aligned with environmental priorities.
In contrast, Trump’s administration would likely focus on tax cuts and deregulation, which could enhance profitability in industries such as energy, manufacturing and defence, tightening credit spreads in those sectors.
Meanwhile, Trump’s trade policies, including broad tariffs, could drive up costs for multinational corporations, especially in technology and industrial sectors, potentially widening spreads due to increased costs.
Furthermore, inflationary pressures could elevate borrowing costs, creating more volatility in the corporate bond market, particularly for high-yield issuers.
Emerging market bonds: Dollar strength and trade relations
Emerging market bonds are overly sensitive to US monetary policy and the strength of the US dollar, making the Fed’s rate cuts and the election’s influence on trade policy pivotal.
A Trump-run office, with its focus on aggressive trade tariffs and fiscal expansion, could result in a stronger dollar, creating challenges for emerging markets. A stronger dollar would raise the cost of servicing dollar-denominated debt for these countries, leading to wider sovereign spreads and weaker currencies, particularly in nations dependent on US trade, such as Mexico. Tariff-related disruptions could also exacerbate bond market volatility in these regions.
On the other hand, Harris is expected to pursue more moderate trade policies, likely leading to a weaker dollar, which would ease debt-servicing costs for emerging markets and mitigate capital outflows. Harris’s emphasis on multilateral cooperation and stable trade relations could provide a more favourable environment for emerging market bonds, reducing the volatility that often hurts these markets during periods of global uncertainty.
Adrien Pichoud is chief economist at Bank Syz. The views expressed above should not be taken as investment advice.