I don’t want to dwell too much on hypothetical US election outcomes given the myriad factors playing havoc with efforts to discern who’s ahead where and with whom in what certainly counts as one of the more extraordinary political cycles the country’s ever seen.

That said, the “red sweep” bearish duration trade’s starting to get some traction again, and it’s worth a quick mention.

A spate of firm — and in some cases outright hot — US macro data already has 10-year yields ~40bps higher off the September lows, within spitting distance of the 200-day. And the October vintage of BofA’s Global Fund Manager poll showed the largest month-to-month de-allocation from bonds in the history of the survey (figure below).

That goes hand in hand with the poll’s other findings, including the pricing out of “hard landing” risk, a big improvement in global growth expectations (on the back of China “stimmy” news), a re-allocation to equities and a rotation to cyclicals within equities.

Lurking in the background is the creeping suspicion that despite Kamala Harris being far more competitive than Joe Biden, Donald Trump might just squeak through after all. If he has enough sway on Capitol Hill to implement his agenda, the US long-end might not be the best own.

In a Thursday note, Nomura’s Charlie McElligott wrote that a hypothetical red sweep is “being perceived by clients as the most negative outcome for duration, and the least dovish outcome for the Fed.” Why? Simple. Here’s Charlie to explain:

[T]urbocharged, ‘run-hot’ policy, fiscal stimulus and deregulation from a Trump administration with [Congress] on board [would] pile onto what’s already understood to be the almost certain future-state of a UST term premium rebuild under either candidate due to deficit trajectories [and] the risk that the US Treasury is forced to resume coupon issuance increases sooner rather than later, potentially at the 1Q25 refunding announcement.

That dynamic would put the Fed in a real bind given their determination to protect the labor market even if it means (quietly, tacitly) countenancing above-target inflation. You can get away with that monetary policy bent as long as you don’t get a big fiscal push, but if you do, and you persist in cutting rates — which, let’s be honest, Trump would all but demand — you’re asking for rekindled inflation.

McElligott drove it home. “In a world where there’s no willingness from US politicians to stop the government spending spree,” the “math” / logic for investors is pretty straightforward:

If fiscal profligacy = higher baseline NGDP = higher neutral rate than the FOMC is currently willing to acknowledge, then bonds aren’t a particularly great own here

Charlie always does an admirable job of staying politically neutral in his notes, but when it comes to this particular conversation (i.e., the fiscal profligacy discussion), staying neutral’s a pretty easy task because, as he put it Thursday, “everybody’s an ‘economic populist’ now.”