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Analysis

Bracing for the return of tariff man

The U.S. 10-year yield skyrocketed by 49bps in October, setting the dollar on fire as markets grapple with the prospect of a Trump comeback and a Republican sweep. Trump’s economic agenda—massive tariffs and aggressive fiscal policies—and could make the 2018-2019 trade war look like a simple board game of Axis & Allies. Should he win in November, expect U.S. long-term yields to climb even higher( 10’s +4.50), as markets may scale back on Fed rate cut expectations. The term premium has nudged up since September, but it’s still below the 2022 and early 2023 peaks. But bond markets continue flashing red as there’s little relief in sight.

In North Asia,  Japan’s bond market is feeling the heat as U.S. yields surge far ahead, widening the yield gap. Japan’s 10-year yield barely rose 12bps in October—a mere fraction of the U.S. move—and the yen is taking a hit. But it’s not just the yield gap driving JPY weakness; Japan’s recent political upheaval is fueling the fire. After the snap election, Japan’s ruling LDP coalition lost its parliamentary majority, falling 18 seats short, leaving Prime Minister Ishiba scrambling for political support. The coalition’s weakened stance throws its budget plans into question and puts a cloud over any substantial economic policy shifts. Markets hate uncertainty, and the yen is feeling the sting.

Political limbo in Japan means the BoJ isn’t likely to rush any rate hikes, giving the dollar yet more runway. ASEAN currencies aren’t immune, either; most slid against the dollar this week, and a Trump win could only deepen the pressure. MYR, closely tied to the yuan, looks especially vulnerable if Trump’s tariffs return, fueling a currency squeeze across Asia.

It’s a bold, precarious moment for global markets: a dollar on steroids, yields pushing higher, and geopolitical tensions adding to the frenzy. If Trump’s policies come roaring back, we could see currencies and bonds worldwide scrambling to find new footing. Buckle up; November might just set the stage for a wild end to the year.

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