One Simple (Political) Reason to Explain Bond Yields

Joe and I have pointed out before that on a longer-term chart the move lower in U.S. Treasury yields doesn’t look so odd.

In fact, it’s the sharp upwards move that starts to look weird. As Joe mentioned before, the move upwards that took place between the U.S. presidential election in November and early in the Spring coincided with a Democratic sweep of Georgia and the flipping of the Senate into Democratic control. That set off a ton of speculation that Democrats would push through a fiscal-heavy agenda — all while the Federal Reserve kept policy relatively easy, which contributed to expectations for higher growth and more inflation and therefore higher yields at the long-end.

The Bear Traps report points out that higher yields as politicians coalesce around an agenda isn’t necessarily a new dynamic. In fact they say the yield curve has a history of steepening as control of the U.S. government shifts from two parties to one party. That’s exactly what happened in late 2016, when President Donald Trump won the presidency with Republicans in control of both the Senate and the House of Representatives.

You can see the dynamic from the (rough) chart below, which shows bond yields moving up when there’s a big spike in Republican or Democrat confidence, according to the Michigan survey of consumers (which I’ve used as a proxy for the parties securing greater control). Of course, the opposite move can also happen when a party loses control — with bond yields heading lower after the GOP lost control of Congress in late 2018.