Bond vigilantes poised to challenge the Oval Office

As we hurtle toward the U.S. election finish line—who thought we’d ever get here?—markets are finally showing a few nerves after a surprisingly smooth autumn. Despite some recent dips, the big picture shows markets have held their ground since August; investors have been shrugging off geopolitical risks and election jitters like seasoned pros.

Yields, however, are on a tear, steadily marching higher as the U.S. economy flexes its muscles. Before the jobs report, it was all rosy data: Real GDP clocked in at a robust 2.8% annualized for Q3, above recent averages and miles above potential growth. The mighty American consumer is at the heart of it, with personal income up 5.6% year-over-year, and consumer confidence hitting a high note since January. This economic resilience has left the Fed’s aggressive rate-cut hopes on the back burner, nudging yields higher.

But let’s flip to the darker side of the yield rally—the growing fiscal elephant in the room. The U.S. budget deficit for the fiscal year ending in September hit $1.83 trillion, pushing public debt to a staggering 96.4% of GDP. That’s a 60-point jump since the pre-2007 crisis days. Enter the Bond Vigilantes, back in action and ready to give the Oval Office a run for its money. October was a horror show for fixed income: U.S. government bonds saw their worst month in two years, with 10-year Treasury yields up by a hefty 50 basis points. The sell-off, rooted in the economy’s strength, is pushing investors to rein in rate-cut fantasies.

And then we’ve got the “Trump Trade”—yes, it’s back. Some view a second Trump term as a potential ticket to higher deficits and a dash of inflation, courtesy of his tax-and-tariff playbook. A Trump victory with a Republican Congress would likely mean a green light for these pro-growth, deficit-stirring policies. But just as traders got cozy with the “run hot” agenda, Monday saw some traders warming up to the “Harris-Gridlock” scenario instead—a smooth, quiet glide path that bond bulls love. With Harris and a divided Congress, radical Democratic policies would face a wall, keeping fiscal volatility in check compared to Trump’s economic flamethrower.

For the Fed, a “red sweep” could mean a whole new level of discomfort. Imagine Jerome Powell, a lifelong Republican handpicked by Trump, forced to square off against a White House running full throttle on growth, backed by a cooperative Congress, and unafraid to chime in on Fed decisions. Even for Powell, the thought of wrestling with an inflation-stoking “red sweep” after a bruising fight with inflation has to be headache-inducing.