US Election Risks Impacting Treasury and Volatility Markets
US Election Risks Being Priced into Treasury and Volatility Markets
Traders who have previously ignored the upcoming US election are now factoring in the associated risks to Treasury and volatility markets, as per Goldman strategists. They continue to advise shorting 10-year TSYs against German bunds. Meanwhile, Citi has profited from a long breakevens position, and BMO is considering entering the trade if rates drop to more favorable buying levels.
The "Catalyst Window" of the VIX
With the November 5 election now in the 30-day "catalyst window" of the VIX, the VIX remains unyieldingly high. Goldman trader Brian Garrett recently noted that it's extremely rare for the VIX to print above 20 when the S&P hits a new all-time high, as it just did. This could be attributed to the market starting to worry about the outcome of the November 5 election, which it had previously been ignoring.
Wall Street's Rates Traders and Strategists on the Election
Here's a look at what Wall Street's rates traders and strategists are saying about the election:
Bank of America
Bank of America maintains a dip-buying stance and a real steepeners bias, favoring the addition of duration with 10-year trading between 4% to 4.25%; the five-year is the preferred tenor. They recommend holding off on adding to duration further out the curve until after peak election risk.
Barclays
Barclays continues to pay 5y5y USD versus EUR rates (via OIS vs. ESTR, entered at 80bp). They believe US far forward rates are still not pricing in enough term premium, and EUR far forwards should reflect the risk of a low neutral rate.
BMO Capital Markets
BMO Capital Markets remains in 2s10s steepener but was stopped out of 2s30s steepener. They are considering entering long 10-year breakevens if they fall below 223bp, the close on the Oct. 4 jobs report day.
Citi
Citi has profited from a long 10-year breakeven position around 2.342%. They believe the Treasury curve is now back to levels that are more consistent with a realistic assessment of benign/soft landing vs. hard landing probabilities for the economy.
Goldman Sachs
Goldman Sachs continues to recommend being short 10-year Treasuries versus bunds. They believe this position is well placed for their baseline but can also benefit if the market presses on election-related risks (either fiscal or tariff-related).
Trump's Odds Increasing
With just weeks to go until the election showdown between Kamala Harris and Donald Trump, odds are increasingly shifting in Trump's favor. A Trump victory would likely be positive for risk sentiment, though more for US assets at the expense of Europe and the rest of the world.
While public polls remain heavily politicized, with massive Democrat oversampling still skewing results, more accurate online betting markets show Trump's spread over Kamala on Polymarket is now the highest it has been and is approaching Trump's blowout odds observed against Joe Biden.
Goldman's Advice to Clients
In its latest Weekly Rundown note, Goldman advised clients to position themselves ahead of the election. They suggest buying GSP24REP if a Republican sweep is expected or buying GSP24DEM if a democratic sweep is expected. They have observed a shift in focus as the election day approaches, with client near-term outlooks depending on the election outcome and clients becoming more comfortable positioning themselves accordingly.
Bottom Line
As the US election draws nearer, it's clear that traders and strategists are factoring in the associated risks and potential outcomes into their strategies. Whether it's a Republican or Democratic victory, the market is poised for significant shifts. But what do you think? How will the election outcome impact the markets, and how should traders position themselves? Share this article with your friends and discuss your thoughts.
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