Treasuries gain as markets reassess ‘Trump trades’ after Biden withdraws

The dollar and Treasury rates fell on Monday following Joe Biden’s decision to withdraw from the US presidential election, as investors evaluated their “Trump trade” bets constructed in recent weeks.

As markets opened to the news that Biden will not seek re-election, the dollar fell 0.1% versus a basket of competitor currencies. US Treasuries rose, bringing the 10-year yield down 0.01 percentage point to 4.23 percent, reflecting what traders described as fresh unknowns in the run-up to the November presidential election.

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“In the next couple of weeks, I think there’s going to be more noise than signal for markets in what comes out on the political side,” said Ray Attrill, global co-head of forex strategy at National Australia Bank in Sydney. “Does this imply that economics will dominate? I do not know. I believe that all contributes to a bit more market hesitancy than the previous month or two.

Growing optimism about former President Donald Trump’s victory, which Rabobank’s Stefan Koopman predicted would result in “deregulation, tax cuts, and increased fiscal spending,” has boosted haven assets such as gold and bitcoin in recent weeks as traders priced in a higher likelihood of crypto-friendly policies, rising geopolitical tensions, and higher US inflation.

However, small moves early on Monday in the prices of both assets — bitcoin advanced 0.4% while gold rose 0.1% to $2,402 per troy ounce — as well as in Treasury yields and the dollar suggest that investors remained cautious about unwinding their recently built positions, according to Koopman, whose “base case” remained a Trump victory in November.

Trump’s winning probability fell marginally on Sunday when Biden publicly supported Vice President Kamala Harris.

Long-dated Treasuries had fallen in recent weeks as investors priced in the possibility of a second Trump administration, believing that his tax-cutting proposals would be inflationary and bad for bonds. However, the impact was clouded by rising predictions of a Federal Reserve interest rate decrease as US inflation declined.

In a note to clients, Stuart Kaiser, head of US equity trading strategy at Citigroup, said Biden’s decision to step down would be a “headwind for Trump trades” and “add an uncertainty premium to the [Democratic National Convention] dates in August, shifting odds back closer to our 50/50 base case” for the election outcome.

S&P 500 futures rose 0.2% ahead of the Wall Street open. European equities recovered after a spate of losses last week, with the Stoxx Europe 600 up 0.6% in early trade.

In Asia, the Nikkei 225 index lost 1.3%. Traders said comparable drops of 1.4% in South Korea’s Kospi and 0.7% in Australia’s S&P/ASX 200 were likely the result of investors reducing positions built up in recent weeks on predictions of a decisive Trump triumph. The yen traded in a tight range of ¥157.5 to the dollar.

In Japan, defense sector stocks such as Mitsubishi Heavy, IHI, and Japan Steel Works have lately risen to multiyear highs on the assumption that a Trump win and a period of US isolationism would push allies like Tokyo to spend more on military equipment. Those same equities fell substantially on Monday, with shipbuilder IHI topping the losers with a 3.7% decrease.

Trump’s frequent demands for tariffs to defend US manufacturers have raised investor fears about firms that may be harmed, but they have also delivered a boost to Asian organizations with significant industrial bases in the United States.

“The wider picture is that investors are likely to continue to regard Trump as having an edge, so there isn’t a significant shift in the narrative. Takeo Kamai, head of execution services at CLSA Securities in Tokyo, stated that Asian markets will undoubtedly follow the lead of the’mother market’ in the United States in this regard.