Market Insider

Despite Trump's move, markets are still expecting stimulus and a sizable one if Democrats sweep

Key Points
  • Treasury yields have been rising, as it looks more likely Joe Biden will win the White House and help the Democrats sweep in the Senate elections.
  • That would put a big infrastructure package in play for early next year, possibly a plus for the economy but negative for bonds since it would bring more debt issuance.
  • The market has also been expecting a big fiscal spending package this year, but President Trump put that in doubt when he said his administration will no longer talk to Democrats about the package until after the election.
A man walks near the New York Stock Exchange (NYSE) on August 31, 2020 at Wall Street in New York City.
Angela Weiss | AFP | Getty Images

Whoever wins the presidential election is likely to seek an infrastructure program next year, but if Democrats win the presidency and Congress, the program could be bigger and come faster.

The pile of new debt from such a program is one of the issues the bond market has been grappling with this week, as former vice president Joe Biden has risen in the polls against President Donald Trump. Treasury yields were at a 4-month high, and the 10-year yield rose to as high as 0.78%, breaking a range it had been in for weeks. 

Separately, the market has been expecting a stimulus package of $1.5 trillion or more aimed at helping businesses, the unemployed and state and local governments, hurt by the coronavirus and economic shutdowns.

But Trump raised doubts about that fiscal package when he said talks with Democrats are off until after the election. The administration had offered a package of $1.6 trillion, but House Speaker Nancy Pelosi has been seeking $2.2 trillion.

The stock market gave up its gains and turned negative after the news Tuesday afternoon.  Bond yields slipped slightly with the 10-year Treasury at 0.74%. Yields move opposite price.

"I think the reality is, even though there's a pretty big knee jerk reaction here, this just delays it," said Jon Hill, senior fixed income strategist at BMP. "There is another program coming. It's just now clear it will not occur until after the election. But 10s (year note yields) only fell to 0.72 or 0.73, which not too long ago was the top of the range. Even after this news, the 10-year yields are higher than where they were yesterday morning."

The benchmark 10-year Treasury is the most widely watched, and it drives rates on all types of loans including mortgages.

Strategists said the trend seems to be for higher yields, but yet to be seen is whether the market will continue to push rates higher on expectations for fiscal spending. If the economic data weakens and the economy looks like it will struggle without stimulus, that could drive yields lower.

"We've got trillions on the table," said Greg Faranello, head of U.S. rates at AmeriVet Securities. He said he ultimately expects a roughly $1.5 trillion or more fiscal stimulus package even with a setback, and then another big package from Biden, if he wins.

Faranello said $1 trillion of that fiscal stimulus spending is already included in the Congressional Budget Office's forecast for a $3.3 trillion deficit this year.

Biden is expected to push for trillions for a big infrastructure package to jump start the economy as soon as he takes office, if he were to win. If the Senate also flips to a Democratic majority, that would give him immediate Congressional support to push a direct spending program. 

Since the debate last week, Biden has been rising in polls and betting markets. He leads by 9 percentage points in's average of major polls, the biggest lead in months over Trump.

"The polling is definitely skewing toward a Biden presidency with the potential for that to trickle down to Congress. Should that be the case, there would be a fair amount of spending," said Faranello. "It's likely to be sooner rather than later." 

Fed Chairman Jerome Powell Tuesday called on Congress to come through with a fiscal spending package. Without more spending, he said it would "lead to a weak recovery, creating unnecessary hardship for households and businesses."

Faranello said Trump could be posturing. "It's certainly not unlike Trump to step in here. He's clearly feeling better, and Treasurys rallied back but I still think we get another liquidity package and it's a matter of time now," he said.

Hill said the bond market had been reacting to the idea of more stimulus but also more Treasury issuance and inflation. He said the market's tone changed last week when Biden began gaining in the polls.

"Everybody's concerned about a peaceful transition of power.  If it's a big Biden win, it's more likely we know the outcome faster and the transition will be smoother," he said. That could boost yields since it would remove some of the flight-to-safety premium in Treasursy.

Hill said the 10-year yield tested 0.72% last week, and broke it yesterday, rising through support at 0.75% to the 0.782% level, the peak after the Fed's Jackson Hole meeting.

"It's rising because the market is beginning to think it will actually reach the 2%," Fed inflation target, Hill said. "That's healthy."