How Bond ETFs Will React to the Election

How will the stock market react to tonight’s election results? 

The debate about the potential impact of either a Trump or Harris victory on stocks is intense, but a consensus seems to be growing about what would happen to bonds under each scenario. 

Over the past month, the yield on the 10-year Treasury has risen when a Trump win seemed more likely, while it’s fallen when a Harris win seemed more plausible. 

That might be because Trump’s policies are more inflationary and could lead to larger deficits, according to most economists.

The Committee for a Responsible Federal Budget projects that Trump’s economic policies would increase the national debt by $7.75 trillion through 2035, nearly double the $3.95 trillion increase they are forecasting for Harris’ policies. 

Meanwhile, a Wall Street Journal survey of 50 economists showed that 68% of them believe that consumer prices would rise faster under Trump than under Harris, while 12% said that inflation would be higher under Harris than under Trump. The remainder said price pressures would be similar under both politicians. 

Trump has promised to institute massive tariffs on China and other U.S. trading partners, which could drive up the price of consumer goods. 

TLT Price Jumps

The iShares 20+ Year Treasury Bond ETF (TLT) jumped nearly 2% on Monday after polls tightened over the weekend, suggesting that the election is a dead heat rather than favoring Trump (bond prices and yields move inversely). 

Before Monday, TLT had been trending down (pushing yields up), which some attributed to the greater likelihood of a Trump victory. 

That said, as compelling as the “Trump = higher yields; Harris = lower yields” equation is, there is no guarantee that a victory by either candidate will lead to any particular market outcome. 

In addition to the election, bonds will be hyper-focused on the FOMC policy meeting later this week, where the U.S. central bank is expected to cut the federal funds rate by 25 basis points and provide clues as to where the rate might head in the future.  

And of course, the steady trickle of economic data and what it shows about the state of the health of the U.S. economy will play a major role in driving bond yields as well. 

So, as important as the election might be for bonds, it’s far from the only factor that will drive prices and yields.