A Trump victory could fuel more inflation. What investors can do now to protect themselves.

By Vivien Lou Chen

Barclays recommends positioning for inflation risks with the help of Treasury inflation-protected securities as the odds of a Trump victory go up

A consensus view has emerged since last Thursday's presidential debate, in which Republican challenger Donald Trump is expected to take the White House and to implement policies that are likely to be more inflationary than under a second term with President Joe Biden.

Traders in the New Zealand-based prediction market known as PredictIt.org were giving Trump a 58% chance of winning versus a 31% likelihood of a Biden victory. The remaining odds were split among other candidates, like Kamala Harris, Gavin Newsom and Robert Kennedy, Jr. Meanwhile, rates on U.S. government debt spiked for a second day on Monday as traders in the $27 trillion Treasury market assessed the likely implications of the Nov. 5 presidential election. Even before last week's televised face-off between Biden and Trump, 16 Nobel Prize-winning economists had concluded that the latter's proposed policies would likely reignite inflation, according to a report by Axios. Trump's proposals include imposing 10% duties on all imports and minimum 60% tariffs on Chinese goods.The combination of views around the growing chances of a Trump victory and the impact of his policies on inflation should "lead the market to be pricing in a considerable risk of higher-than-target inflation in the coming years," said strategists Michael Pond and Jonathan Hill of Barclays UK:BARC. In a note released on Friday, they recommended that investors seek out inflation protection in the Treasury market, by going long on 5-year breakevens.

The 5-year breakeven rate is the market's estimate of what inflation will average over the next five years, and is calculated by subtracting the yield on the 5-year Treasury inflation-protected security from that of its nominal counterpart of the same maturity. Barclays expects the 5-year breakeven rate, which is currently around 2.25%, to reach 2.5%.Attention is being drawn to the inflationary implications of the Nov. 5 presidential election, after many bond-market participants had initially focused on the likelihood of a bigger federal deficit in mapping out what a victory by either candidate could mean.

If consensus views hold in the coming months, Pond and Hill said they would expect them "to be embedded in the market via higher breakevens as the November elections approach."

Shares of the roughly $17.6 billion iShares TIPS Bond ETF TIP were off almost 0.4% on Monday. Meanwhile, a selloff in U.S. government debt sent the 10-year yield BX:TMUBMUSD10Y up by 13.6 basis points to 4.478%, and the 30-year rate BX:TMUBMUSD30Y up by 14 basis points to 4.642% - the highest closing levels since May 31. Stocks DJIA SPX COMP finished higher, led by a 0.8% gain the Nasdaq Composite.

-Vivien Lou Chen

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07-01-24 1603ET

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