The U.S. election results are producing opportunities for retirees and other savers — as long as they have some money set aside.
The rate on 10-year Treasury notes BX: TMUBMUSD10Y has leapt toward last year’s highs in the wake of Tuesday’s result, which has put the Republican Party in control of the White House and the Senate and may also leave it in control of the House of Representatives. The interest rates on inflation-protected U.S. government bonds are nearing the highest levels seen since the global financial crisis in 2008.
In fact, 10-year Treasury yields of nearly 4.7%, and long-term inflation-protected yields of nearly 2.3%, represent appealing low-risk savings opportunities for those looking for security and income rather than the volatile growth that comes from stocks.
Savers can buy these bonds directly at many brokerage firms, or they can buy a basket of bonds through mutual funds or exchange-traded funds.
A big risk is that these interest rates could keep rising. But they are already a dramatic improvement from where they were before the polls closed on Election Day, and from the lows seen in September.
The interest rate on the 10-year Treasury note jumped by 0.2 percentage points to 4.44% on news of the “red wave” election. The rate on inflation-protected TIPS bonds rose as high as 2.25% on long-term bonds, a four-month high.
Long-term interest rates rose as the market digested the budgetary and economic implications of the election sweep.
“For a Treasury market that was already reeling, Trump’s victory has put additional pressure on rates, as evidenced by the historic move higher in Treasury yields as the Trump victory became clearer overnight,” Lawrence Gillum, chief fixed-income strategist for LPL Financial, said in a note to clients.
“Treasurys began to sharply bear steepen on a Trump victory as markets pencil in higher deficits and inflation,” the strategy team at TD Securities reported. “A Red Wave is likely to bring a wholesale renewal of the [2017] tax cuts and some additional tax cuts. This amounts to additional deficits of approximately $5 [trillion] over the coming decade relative to the current Congressional Budget Office (CBO) baseline.”
They estimate that President-elect Trump’s signature policies, including deporting large numbers of immigrants and imposing tariffs on imports, would add an extra 1 percentage point to inflation next year and 0.3 points to inflation in 2026.
Regardless of the political and economic consequences, if the government has to borrow a lot more money, that is expected to drive up the cost of borrowing, with the government paying a higher rate of interest to attract the money it needs.
This raises the question of how far a Trump administration might instead embrace the financial policy known as modern monetary theory, and simply print the money needed to finance the deficits. This is a policy popularized by Stephanie Kelton, an economics professor at Stony Brook University and a former economic adviser to Sen. Bernie Sanders, the Vermont independent.
Doing that would require Trump to exert more direct control over the Federal Reserve once he is president, something he has already said he wants to do.
Not everyone is a winner from higher interest rates on U.S. Treasury bonds. The higher interest rate will drive up the amount of tax money that has to be spent servicing the debt. This is already the second-biggest item in the federal budget, exceeding defense, Medicare and everything else.
Rising long-term interest rates are also bad news for all those who already have their money invested in bonds. Bonds are like seesaws: As the yield, or effective interest rate, rises, the price falls. The iShares Core U.S. Aggregate Bond exchange-traded fund AGG fell 0.8% following the election result, the iShares 7-10 Year Treasury Bond ETF IEF fell 1% and the Vanguard Extended Duration ETF EDV, which owns longer-term U.S. Treasury bonds, tumbled 4%.
Those worried about the impact of inflation on their long-term bonds may be better advised to hold inflation-protected TIPS bonds, whose annual interest payments are effectively adjusted to reflect changes in the consumer-price index.
Ordinary Americans hold an estimated $5.1 trillion in bond mutual funds and exchange-traded funds, plus another $1.7 trillion in hybrid stock-and-bond funds, according to data from the Investment Company Institute.
