One Simple Political Reason to Explain Bond Yields
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The yield curve often steepens when control of the US government shifts from two parties to one, as seen in late 2016 & early 2021. Historical data shows bond yields rise with increased party confidence, as measured by the Michigan survey of consumers.
Tracy Alloway, "One Simple (Political) Reason to Explain Bond Yields," Bloomberg, July 21, 2021, https://www.bloomberg.com/news/articles/2021-07-21/one-simple-political-reason-to-explain-bond-yields
One Simple (Political) Reason to Explain Bond Yields
Joe and I have pointed out before that on a longer-term chart the move lower in U.S. Treasury yields doesn’t look so odd.
In fact, it’s the sharp upwards move that starts to look weird. As Joe mentioned before, the move upwards that took place between the U.S. presidential election in November and early in the Spring coincided with a Democratic sweep of Georgia and the flipping of the Senate into Democratic control. That set off a ton of speculation that Democrats would push through a fiscal-heavy agenda — all while the Federal Reserve kept policy relatively easy, which contributed to expectations for higher growth and more inflation and therefore higher yields at the long-end.
The Bear Traps report points out that higher yields as politicians coalesce around an agenda isn’t necessarily a new dynamic. In fact they say the yield curve has a history of steepening as control of the U.S. government shifts from two parties to one party. That’s exactly what happened in late 2016, when President Donald Trump won the presidency with Republicans in control of both the Senate and the House of Representatives.
You can see the dynamic from the (rough) chart below, which shows bond yields moving up when there’s a big spike in Republican or Democrat confidence, according to the Michigan survey of consumers (which I’ve used as a proxy for the parties securing greater control). Of course, the opposite move can also happen when a party loses control — with bond yields heading lower after the GOP lost control of Congress in late 2018.
The suggestion is that higher bond yields could still come into play if Democrats make a concerted push for a fiscal-laden agenda.
“As you move from two-party to one-party control, the curve steepens (higher long-end yields) as global investors digest the political risk of having one party with their hands on the purse strings,” Bear Traps wrote in its report published on Tuesday. “In the summer of 2017, tax cuts were deemed ‘dead’— bond yields crashed, by November/December of that year, the GOP finally delivered of the fiscal juice, and the curve re-steepened.”
Ed Comment: “It’s the FDR effect—each side goes nuts without the other side to rein them in.”
Tracy Alloway looks at US Federal election’s impact on yields, "...on a longer-term chart the move lower in U.S. Treasury yields doesn’t look so odd. In fact, it’s the sharp upwards move that starts to look weird. As Joe mentioned before, the move upwards that took place between the U.S. presidential election in November and early in the Spring coincided with a Democratic sweep of Georgia and the flipping of the Senate into Democratic control. That set off a ton of speculation that Democrats would push through a fiscal-heavy agenda — all while the Federal Reserve kept policy relatively easy, which contributed to expectations for higher growth and more inflation and therefore higher yields at the long-end.... the yield curve has a history of steepening as control of the U.S. government shifts from two parties to one party. That’s exactly what happened in late 2016, when President Donald Trump won the presidency with Republicans in control of both the Senate and the House of Representatives. You can see the dynamic from the (rough) chart below, which shows bond yields moving up when there’s a big spike in Republican or Democrat confidence, according to the Michigan survey of consumers (which I’ve used as a proxy for the parties securing greater control). Of course, the opposite move can also happen when a party loses control — with bond yields heading lower after the GOP lost control of Congress in late 2018...."