As the day of the US election draws near, investors are reading the auguries to try and divine the potential result. While nothing's certain even at this late stage, it makes sense to consider the core scenarios that may impact markets and investors in the weeks ahead.
Right now, market behaviour indicates that investors are reasonably confident of a Biden victory. Betting odds – which are often a good indicator of conviction among people with money at stake – put the chance of a Biden win at 60%. (Source: Bloomberg/Predictit)
Rising bond yields (meaning lower bond prices) are one indicator that markets expect a Democrat victory. A Democrat president – particularly with the backing of a Democrat House and Senate – will swiftly introduce a generous government support package for people and companies affected by the coronavirus pandemic. This should lead to higher spending, improved economic growth and higher inflation, all of which are negative for bonds.
We can see that bond yields have risen as the odds of a Biden victory has improved. While the rise is modest relative to longer-term moves, it shows the market expectation that that the support package will be bigger than previously anticipated.
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