What do bond markets know about the election?

Rob Armstrong (0:06)

Pushkin. Ten-year bond yields are up, and Wall Street thinks that's because there's a rising probability of a second Trump presidency. Today on the show is the bond market telling us something about the election.

This is Unhedged, the Markets and Finance podcast from the Financial Times. I'm Rob Armstrong, coming to you from Unhedged World Headquarters in downtown New York City. Today, I'm joined by Derek Brower, who is the FT's politics editor. US politics editor?

Derek Brower (0:45)

US political news editor.

Rob Armstrong (0:48)

US political.

Derek Brower (0:49)

Get it right, full title.

Rob Armstrong (0:53)

So Derek knows more about American politics than almost anyone because he has to read and edit all of the FT's cover.

Derek Brower (1:02)

I know everything, everything about US politics ever.

Rob Armstrong (1:05)

Okay, Derek. So here's what they're saying on Wall Street. The 10-year bond is selling off. As a reminder to listeners, when bonds sell off yields rise, we're seeing the 10-year yield rise. That may be down to that strong jobs report and growth. However, when I speak to bond managers on Wall Street, when I speak to bond analysts on Wall Street, the first thing they talk about is that this is a Trump trade. They think this is a Trump trade because we might get a red sweep, which means crazy spending. It's a Trump trade because Trump doesn't care about deficits at all. He's perfectly happy with deficits.

Derek Brower (1:43)

Nobody cares about deficits.

Rob Armstrong (1:44)

Nobody cares about deficits.

Derek Brower (1:45)

I mean, that's one thing he says.

Rob Armstrong (1:47)

He's one of the everybody who doesn't care about deficits. He's going to limit supply of labor by stopping illegal immigration and throwing immigrants out of the country. Finally, he's going to put tariffs on, which are going to restrict the flow of goods. All of those last two are inflationary, and so rates have to be higher for this hotter and more inflationary economy everyone thinks Trump is going to create. So let me ask you, first question is, has it actually become more likely, according to the polls or the betting markets or anything else, in the last couple of weeks that Trump is going to win? Is that something that's going to happen?

Derek Brower (2:24)

Well, the betting markets, those are two different things, the betting markets and the polls. The betting markets are pretty sure that Trump is going to win, and we can get into the reliability of them or not.

Rob Armstrong (2:34)

Yeah, let's do.

Derek Brower (2:34)

Well, they weren't super reliable in 2016, but neither was the street or anybody you asked among pollsters or anything. They may have been a bit more reliable in 2020, but that was an exceptional election because of the pandemic. Right. So we don't know, but they're pretty convinced at the moment that Trump is going to win this. The polls have been drifting marginally in Trump's favor in the past couple of weeks. And if you looked at them all, you would see a sea of red in the crucial seven swing states.

Rob Armstrong (3:09)

Yes. Just remind us which ones those are. Michigan.

Derek Brower (3:13)

So Michigan, wisconsin, Pennsylvania, those are the three blue wall states, so-called, because the Democrats used to be able to rely on them almost every election. Trump pierced that blue wall in 2016 Then Georgia, North Carolina, those are two southern states and some belt states that are close. Then Arizona and Nevada.

Rob Armstrong (3:35)

Nevada. You see a sea of red in those seven.

Derek Brower (3:38)

The only one in the FT's poll tracker today, the only one where Harris is up, and these are tiny margins, but the only one of those that Harris is leading in is Michigan, and it's by 0.5 percent or something.

Rob Armstrong (3:52)

So, why isn't this sort of open and shut under those circumstances?

Derek Brower (3:56)

Because the polls, I mean...

Rob Armstrong (3:58)

It's so close.

Derek Brower (3:59)

It's so close. These are all within the margin of error. That's the first thing to say. And we just don't know. There are huge pockets of each of these states, where we don't know how they're going to vote. They could be decisive. These margins are so tiny that whether it rains on the election day, or whether people get out of bed grumpy or not could affect them. And these are all sweet. And also, by the way, as ever in a US election, the fate of America and possibly the world is going to be decided by a bunch of people who haven't been paying attention so far, these undecided voters. So it's really, really hard to tell.