Ditch this ‘Trump trade’ as Kamala Harris flips the script: Read

The bank’s global macro strategy team advised clients on Friday to dump any remaining bets that the 30-year Treasury will underperform five-year notes after taking half-profits on the position earlier this month. The spread between the five-year and 30-year yields widened to 38 basis points from about 20 basis points when Citigroup first recommended the deal.

Strategists led by Dirk Willer promoted the so-called sloping curve swap after President Joe Biden’s poor performance in the late June debates appeared to clear the way for Donald Trump to retake the White House.

The former president’s support for looser fiscal policy and high tariffs are generally expected to deepen the federal deficit and fuel inflation, which would undermine long-term bonds. The trade would also benefit from a move by the Federal Reserve to cut interest rates, which will lead to stronger performance of shorter-dated notes.

By Aug. 2, Willer and his colleagues were advising investors to start reducing positions after a surprise rise in unemployment sent five-year yields to their lowest level since May 2023, a move that strategists considered excessive.

Citigroup canceled the remainder of the deal as betting markets for Trump’s chances of winning the Nov. 5 election fell following Biden’s replacement by Kamala Harris as the Democratic nominee.

This week’s stronger-than-expected retail sales and lower-than-forecast jobless claims also suggest Fed Chairman Jerome Powell is less likely to signal aggressive policy easing at a symposium next week in Jackson Hole, Wyoming, according to strategists. The rates market has fully priced in a quarter-point cut at the Fed’s next policy meeting in September and a 16% chance of a jumbo half-point cut.

“Election trades have disappeared from the market’s field of view and are unlikely to return before the FOMC in September,” Willer wrote in a note. “The combination of strong retail sales and lower claims means Powell will be hard pressed to be more dovish than market prices at the upcoming Jackson Hole meeting.”

The Treasury yield curve typically slopes as the Fed begins to cut interest rates, causing shorter-dated, policy-sensitive bonds to outperform.

Willer said the steepener remains “the right trade in the big picture,” but it costs about 12 basis points a month to hold the position. As a result, “we are tactically taking profits from this transaction.”