US Election countdown: Is Harris set for a strong win?
Getting to the other side of the election will make us much wiser whether the US bond market will remain a source of concern for all markets
By John J. Hardy, Chief Macro Strategist at Saxo
This week, we look at why Harris may perform far better in this election than most believed likely. Separately, we also look at the US bond market that is flashing a warning signal and should concern everyone, particularly if it doesn’t calm down after the election.
Something strange has happened over the last week in the US election season: while the polls have continued to supposedly show an ever-tighter race, the betting markets took a hard turn away from Trump and toward Harris, with some prediction markets now even giving Harris better odds than Trump of winning.
In recent weeks, we looked at how the betting odds and even financial markets were increasingly betting on a second Trump administration and even a Republican sweep of Congress that would deliver “Trump 2.0”. Then betting odds suddenly started shifting against Trump’s favour over the last week. Markets that had risen on anticipation of a Trump 2.0, like small cap stocks, cryptocurrencies, and even Donald Trump’s own Trump Media & Technology Group, have also fallen. What was behind this shift?
First, the betting odds were suspect in the first place, as several accounts placed identical and very large pro-Trump bets. Now, some arguably “smarter money” has come in recently because the odds had become too skewed in favour of Trump. But if that money is smart, then it must be smarter than the polls, which supposedly show that this race is only getting tighter with every passing day, and we’re all supposed to believe that the closer the popular vote, the easier it is for Trump to win because of the Electoral College system. So that smart money must know something else: could it be signs that Harris has a much better chance of victory in this election?
How could Harris win and by a stronger margin than most polls predict?
There are two reasons why we might get not only a Harris victory, but one that is a bit stronger than most would have thought likely.
The pollsters have messed up again. After the polls got things so wrong in 2016 and 2020 (confusing me badly as well, particularly in 2020), this time I have more closely followed discussions among the more insightful and well-connected political commentators and polling researchers on what they are seeing on the ground. In particular, the polling researchers’ discussion of the general paranoia among pollsters at under-estimating Trump, which was especially bad in 2020, suggests that they may have over-corrected and may be over-estimating his strength. This was seen in the 2022 US mid-term election results as well, where the polling overestimated Republican strength.
Surprising turnout patterns among actual voters. No matter how hard they try, pollsters can’t get an accurate reading of what kinds of voters will end up being the most motivated to actually get out and vote. In this election, I suspect that the decisive difference will be women who are reacting against Trump’s persona and the 2022 changes in US abortion law made by Supreme Court judges he appointed. Polling shows that voting differences by gender are the largest ever measured, with women favouring Harris and men favouring Trump. And recent election shows that women are far more likely to vote than men, especially among younger voters.
So if women show up in far greater numbers than men, Harris could win a surprisingly strong victory, although the odds of the Democrats taking the Senate and therefore winning a “Democratic sweep” are still probably low unless the polls are badly off-base. A Harris presidency with a divided Congress is the most “low energy” outcome for financial markets, as it brings the least potential for big policy moves. That might be big relief for one market that is currently flashing red: the US treasury market.
Chart of the week: US treasuries, the market to watch post-election.
The chart above shows an ETF that holds US treasury notes that mature in 20 or more years. US Treasury notes are US sovereign bonds issued by the United States government. If interest rates rise, the prices of bonds fall, as does the price of this ETF. In fact, holders of this ETF have last more than 35% over the last three years.
While the US central bank, the Federal Reserve or “Fed”, sets the rate for short-term borrowing, longer treasury yields are set more by market forces. Interesting to note that the recent high point for long-term bonds (or the recent low in yields) in mid-September occurred on the very day that the Fed started cutting rates for the first time since the pandemic, chopping 0.50% off the short-term borrowing rate. Why? Could this be the market telling us that it is concerned that the Fed is worried more about ensuring that the government can afford to service its debt rather than setting rates appropriately to the levels of inflation and economic growth in the economy? Or was the fall in bonds, or rise in yields, mostly related to the surprising resilience of the US economy? Or how much of the weakness in the bond market had to do with the sharply rising odds from early October of Trump winning the presidency and bringing tax cuts that worsen already massive US deficits? It’s very hard to know the answer – but getting to the other side of the election will make us much wiser on why the US bond market has been so weak and whether it will remain a source of concern for all markets.
The US treasury market and the US election
A couple of weeks back, when the odds of a Trump victory were rising strongly in betting markets, many observers noted that the markets appeared to be positioning for a Trump presidency and that the sharp rise in US treasury yields was one of the signs of that, as a Trump 2.0 presidency would mean much larger deficits after a new round of Trump tax cuts. Trump’s odds of winning have dropped significantly over the last week, but US Treasury yields continued to surge into the end of last week, even if the situation cooled early Monday. This makes it less clear that the rise in yields has mostly to do with the election and perhaps as much to do with Fed policy and the backdrop of enormous and rising US debt levels.
Regardless, interest rates are critical to follow for all investors when they are flashing red as they are now. Getting to the other side of the election tells us (and the new president) whether the bond market will remain weak or breathe a sigh of relief – for example on a “gridlock” scenario, in which the president’s party does not have control of both houses of Congress.
The US treasury market is the centre of gravity for global markets, and the world can’t afford a weak treasury market, which not only weakens bond markets globally, but can drive uncertainty and volatility in equity markets as well because it impacts stock valuations. And there are no easy solutions to bringing order to a chaotic bond market, either. Big cuts in government spending to shrink the deficit would tank the economy, while Fed intervention to bring order could blast the US dollar lower and worsen inflation. The bond market will be priority number one for markets and for the incoming president if it doesn’t shape up post-election.
Brace for impact
That’s it for this week. If the election is tilting more aggressively in favour of either candidate than the polls suggest, markets may begin reacting within a couple of hours of the polls closing in the first big states in the east, starting at mid-night Tuesday night, GMT time. If things are nail-biting close, we may not know the full picture until closer to the weekend.
