The impact of Joe Biden dropping out of the presidential race on the bond and foreign exchange markets is a topic of much discussion and speculation. Following the recent debate on June 28, there was a noticeable jump in long-dated Treasury yields, signaling concerns about a potential Republican sweep, further tax cuts, and a growing deficit. However, the market quickly reevaluated its position, considering factors such as the election timeline and the possibility of Biden withdrawing from the race.
Some analysts believe that the market is also factoring in the potential second-order effects of a Republican victory. In the wake of the Biden/Trump debate, the Treasury market initially reacted with concerns about supply and reflation. However, as the dust settled and Trump’s odds improved, there was a shift towards a more bearish outlook, anticipating a slowdown in the Federal Reserve’s normalization process in the future.
In terms of the foreign exchange market, the general consensus is that a positive outcome for Trump would be bullish for the dollar, while a positive outcome for Biden or the Democrats would be bearish. It is important to note, however, that these factors may not completely dominate market trends. Additionally, the upcoming House race in 2024 is seen as crucial, as Democrats are only slightly behind in the race for control of the House, which could lead to a split Congress and potential gridlock.
Looking ahead, the bond market is expected to remain constructive in the coming weeks, with a bias towards lower yields. It is essential to consider that these market dynamics are influenced by broader economic and inflation outlooks, which are subject to change. Overall, the impact of political developments on bond and FX markets is complex and multifaceted, requiring a nuanced understanding of various factors at play.
