Government Spending to Drive Markets Beyond Election Results

Key takeaways

• Treasury yields have climbed despite Fed's dovish shift, suggesting structural forces beyond election uncertainty
• Both candidates' spending plans could keep pressure on long-term borrowing costs, even as short-term rates decline
• Recent dollar strength reflects broader market dynamics around U.S. yields rather than just pre-election positioning

The U.S. Treasury market is sending a clear signal about government spending – and it's not just about the election. That's the view from Forex.com (a wholly-owned subsidiary of StoneX Group Inc) senior strategist James Stanley, who sees sustained pressure on long-term borrowing costs no matter who wins the White House this week.

Stanley's assessment, provided to the New York Times, comes as the benchmark 10-year Treasury yield has jumped close to 50 basis points since early October, pushing mortgage rates above 6.7% and rattling markets that had started to price in Federal Reserve rate cuts.

The most recent round of bond market volatility reflects more than just election jitters. While markets typically see some turbulence ahead of presidential contests, the current dynamic in rates suggests deeper forces at work. Both candidates have proposed policies that would require substantial government borrowing at a time when the economy is already showing surprising strength.

"Regardless of the outcome," says Stanley, "the government is probably going to end up spending more money." That spending outlook has implications across markets. As noted in the Times article, the dollar has gained more than three percent against major currencies in the past month as higher U.S. yields attract investors. The S&P 500 dipped about one percent in October – a typical pre-election pattern – though recent tech earnings have arguably played a bigger role in market moves than campaign headlines.

For investors trying to position around the election, Stanley's analysis suggests looking past the immediate results to focus on the broader trajectory of fiscal policy and its impact on rates. The Fed may be cutting short-term rates, but longer-term borrowing costs could remain elevated if government spending maintains its current course.

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Read the original New York Times article here (subscription required).

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