Fixed income markets historically have not had a favorite political party, but change can be volatile. Many studies have shown there’s no relationship between the stock market and political outcome, but interest rates have the potential to be more directly tied to policy decisions. Markets are currently weighing potential Trump administration policies - low taxes, high spending, immigration restrictions, and high tariffs - that could create fiscal expansion and inflationary pressures. This was reflected on November 6th when 10-year Treasury yields jumped 16 bps to 4.42% (the highest since early July) before retreating close to pre-election levels as markets reconsidered.
To examine the historical impact of presidential elections on long-term interest rates, we focus our observations on when the presidential party changed. This eliminates second-term and likely similar-minded administrations, which we expect to have less market impact. However, historical analysis of 10-year Treasury yields during party transitions (examining 100 days before and after Election Day) reveals no consistent trend. While yields increased following two of three Republican victories, these moves remained within historical volatility bands. Though no directional trend is clear from the graph, it is clear that there is more dispersion in the 100 days after than the 100 days before the election. If volatility remained consistent before and after these elections, the chart would look roughly symmetric.
10-Year Treasury Yield Changes (%) Around Party Transitions: ±100 Days from Election Day, 1964-2024
Source: Treasury yield data is from U.S. Department of the Treasury. Chart shows party transitions: Republicans taking office (red lines) in 1968, 2000, 2016, 2024 (dashed); Democrats taking office (blue lines) in 1976, 1992, 2008, 2020.
Fixed income in portfolios: What are the implications for bond allocations in an optimized portfolio if even the direction of future rates remains uncertain under a different administration? Firstly, the Treasury yield curve has flattened significantly since year start, with both short-term yields falling while long-term yields rose, as seen below. Additionally, long Treasurys offer diversification benefits through negative correlation to stocks, albeit with high uncertainty. Secondly, the previously clear trajectory of declining rates alongside moderating inflation has become less certain, due to the uncertainty of future fiscal policy and its effects on inflation. With yields above 4%, short to intermediate term bonds, however, are less impacted by inflation uncertainty, and may be relatively attractive on a risk-adjusted basis. Our focus is on optimal diversification across bond segments based on risk-return dynamics, without necessarily betting on the policy, and we continue to adjust positioning as market conditions evolve.
U.S. Treasuries Yield Curve
Source: U.S. Department of the Treasury
Takeaway: Short-, intermediate-, and long-term bonds all have value in a diversified portfolio.
Bond markets are closed on Veterans Day, but bond ETFs are trading well. Much like international ETFs that trade on local holidays, ETFs continue to function and provide liquidity even when their underlying constituents are not. (Note however that New Frontier prefers to trade on days with full asset primary and secondary market liquidity in pursuit of the lowest possible transaction costs)