This is an audio transcript of the Unhedged podcast episode: ‘What do bond markets know about the election?’

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Robert Armstrong
Ten-year bond yields are up and Wall Street thinks that’s because there’s a rising probability of a second Trump presidency. Today on the show, is the bond market telling us something about the election?

This is Unhedged, the markets and finance podcast from the Financial Times. I’m Rob Armstrong, coming to you from Unhedged world headquarters in downtown New York City. And today I’m joined by Derek Brower, who is the FT’s politics editor, US politics editor. (Inaudible) title correct?

Derek Brower
US political news editor. Get it right. Full title. (Laughter)

Robert Armstrong
(Laughter) So Derek knows more about American politics than almost anyone because he has to read and edit all of the FT’s coverage on the topic.

Derek Brower
I know everything, everything about US politics ever. (Laughter)

Robert Armstrong
OK, Derek, so here’s what they’re saying on Wall Street. The 10-year bond is selling off. As a reminder to listeners, when bonds sell off yields rise. We’re seeing the 10-year yield rise. That may be down to that strong jobs report and growth.

However, when I speak to bond managers on Wall Street, when I speak to bond analysts on Wall Street, the first thing they talk about is that this is a Trump trade. And they think this is a Trump trade because we might get a red sweep, which means crazy spending. It’s a Trump trade because Trump doesn’t care about deficits at all. He’s perfectly happy with deficits.

Derek Brower
Nobody cares about deficits.

Robert Armstrong
Nobody cares about deficits.

Derek Brower
I mean, that’s (inaudible).

Robert Armstrong
Yeah, yeah, yeah. But he’s one of the everybody who doesn’t care about deficits. He’s gonna limit supply of labour by stopping illegal immigration and throwing immigrants out of the country. And finally, he’s gonna put tariffs on which are gonna restrict the flow of goods. All of . . . Those last two are inflationary. And so rates have to be higher for this hotter and more inflationary economy everyone thinks Trump is gonna create.

So let me ask you. The first question is, has it actually become more likely, according to the polls or the betting markets or anything else, in the last couple of weeks that Trump is gonna win? Is that something that’s gonna happen?

Derek Brower
Well, the betting markets, those are two different things, the betting markets and the polls. Betting markets are pretty sure that Trump is going to win. And we can get into the reliability of them or…

Robert Armstrong
Yeah, let’s do. 

Derek Brower
Well, they weren’t super reliable in 2016, but neither was the Street.

Robert Armstrong
Anything else.

Derek Brower
Or anybody you asked among pollsters or anything. They may have been a bit more reliable in 2020, but that was an exceptional election because of the pandemic. So we don’t know. But they’re pretty convinced at the moment that Trump is going to win this. The polls have been drifting marginally in Trump’s favour in the past couple of weeks. And I would . . . If you looked at them all, you would see kind of a sea of red in the crucial seven swing states.

Robert Armstrong
Yes. Just remind us which ones those are. Michigan.

Derek Brower
So Michigan, Wisconsin, Pennsylvania. Those are the three blue wall states, so-called because the Democrats used to rely on them almost every election. Trump kind of pierced that blue wall in 2016. Then Georgia, North Carolina, those are two southern states and sunbelt states that are close. And then Arizona and Nevada.

Robert Armstrong
And Nevada. And you see a sea of red in those seven.

Derek Brower
The only one in our like, in the FT’s poll tracker today, the only one where Harris is up — and these are tiny, tiny margins. But the only one of those that Harris is leading in is Michigan. And it’s by like 0.5 a per cent or something.

Robert Armstrong
So why isn’t this sort of open and shut under those circumstances?

Derek Brower
Because the polls, I mean . . . 

Robert Armstrong
It’s so close.

Derek Brower
It’s so close. These are all within the margin of error, that’s the first thing to say. And we just don’t know. There are huge pockets of each of these states where we don’t know how they’re gonna vote. They could be decisive. And these margins are so tiny that whether it rains on election day or whether people get out of bed grumpy or not could affect them. And these are all swing. And also, by the way, as ever in a US election, the fate of America and possibly the world is gonna be decided by a bunch of people who haven’t been paying attention so far, these undecided voters. So it’s really, really hard to tell.

Robert Armstrong
Yes. I do wanna get back to the financial implications of all this. But I wanna dig in on the polls a little bit more. 2016, we all learned that there was something badly wrong with the polling. Is there good reason to believe that the polling techniques and methodologies have improved in the intervening years?

Derek Brower
The pollsters would say absolutely. They’re doing a bunch of things, are doing this thing now where they ask people who they voted for last time, which is a way that they think allows them to control for the shy Trump voter, which was a thing in the past. Whether the shy Trump voter still exists is another question. But remember, in 2022, in the midterm elections, this was after Roe versus Wade. There was a big vote that was unexpected for the Democrats.

Robert Armstrong
Yes. Trumpy candidates, Maga candidates underperformed.

Derek Brower
Underperformed. And the ones that Trump endorsed, in particular, seemed to underperform. So who . . . I mean, frankly, who knows?

What we can say is the electorate is really clear that the economy is the biggest issue for them that comes up in all of the polling, including ours. Our FT-Michigan Ross poll is clear about that. The economy is the biggest issue.

The next thing that they constantly complain about, the voters, is inflation, or not just inflation but the legacy of inflation, ie high prices — how expensive everything is in this country, which everybody knows.

Robert Armstrong
Yeah. We’ve talked about that a lot on this show. Drives people crazy.

Derek Brower
And as you wrote about in that excellent piece you did a couple of weeks ago from the shopping mall in Philadelphia, that is a big deal if you’re paying $10 for ice cream in a mall and, you know, it’s crazy. And everybody knows. And they constantly complain about that in polling.

Robert Armstrong
Yes. And this reminds me, I mean, it has an echo of the 1980 election when it was Carter versus Reagan, and it was very similar in that inflation was coming down but the shadow . . . 

Derek Brower
You were what, in your early twenties then?

Robert Armstrong
Yeah, I was 35 years old then. (Laughter) And the election was held. Inflation had fallen, but we were still operating in the shadow of inflation.

Derek Brower
Right. That’s the thing. And if the economy is the decisive issue, the polling on the economy is really bad. It was terrible for Joe Biden before he dropped out. It improved a bit for Harris. And funnily enough, the more people learned about her plans, it seems the less favourable they are to them. And now our own poll this week showed that Trump had retaken the lead on who Americans trust most on the economy.

Robert Armstrong
Yes, that’s our splash in the paper today, I guess.

Derek Brower
Yeah, that’s right. And then the Journal also, the Wall Street Journal has more polling which shows that on the economy, again, the most important issue, it’s the economy, stupid, once again. On that issue, the polling is terrible for Harris, frankly.

The reason that we can’t be certain, even with those economy things, is that the Democrats hope and believe there is a huge swell of women who are going to decide this election and it’s going to be the same thing that gave them a good showing in 2022 in the midterms, and that is concerns about Republican or Donald Trump’s restrictions on abortion rights. And they think that that will overwhelm the economy side of things.

And the economy is improving, etc, etc. So they think that they can neutralise or they’re hoping that that vote from women neutralises the polling about the economy that would suggest that she’s gonna lose.

Robert Armstrong
So that’s what we’re kind of watching for when the results roll out. Let’s turn to the policy stuff. The consensus on Wall Street, as I said, is remarkably strong that Trump will be inflationary in these various ways.

From your point of view, from the point of view of the FT coverage, is that right? So again, it’s we’ll get a red sweep. Anytime you have a sweep, red or blue, that leads to higher spending and higher deficits. And then on top of that, you have immigration and tariffs about which Trump is enthusiastic and are, in theory, inflationary. What’s our coverage on that been saying? What’s your feeling about those issues?

Derek Brower
Well, we have been covering the tariff thing because our readers care about that a lot. He wants to impose tariffs and what, 10-20 per cent, somewhere in that range across the board than 60 per cent, 100 per cent, whatever. He says different things, different times on China, particularly.

Robert Armstrong
And can he do that by himself?

Derek Brower
Well, that’s a debate. Probably not. Some people think he can.

Robert Armstrong
So it’s a legal debate about whether he needs to pass a law or can do it by . . . 

Derek Brower
Yeah, by executive action.

Robert Armstrong
Right. So which leads us back to the red sweep. We’ve talked about the odds of Harris versus Trump. What does our polling say about the odds of a sweep, which would, of course, make it easier for Trump to get his tariff and immigration actions through?

Derek Brower
Well, I think the safest prediction is none of these are safe, but the safest is probably that the Senate goes Republican, because it may come down to this race in Montana where the Republican is ahead. This is a race that I think is probably the most expensive per vote in the history of elections.

Robert Armstrong
Yes, ’cause there’s four people in Montana, as it turns out.

Derek Brower
Yeah, about four. Isn’t it three now, or four?

Robert Armstrong
Yeah, there’s three or four people and six cows. (Laughter)

Derek Brower
Six cows and a zillion dollars being spent on their votes per person. Yeah. No, I mean . . . 

Robert Armstrong
It is extremely hard to get a cow to vote Democratic, in my experience.

Derek Brower
Which is why they are bombarding them with TV ads. (Robert laughs) It is an incredible story, actually. We wrote about it. It’s this Senate race between Tim Sheehy and Jon Tester, the Democrat. And there’s a lot of money being spent on that one because it might decide the future of the Senate and the future of American democracy, etc, etc. So there’s a lot being spent. Anyway.

Robert Armstrong
So the Senate will go Democratic by a small margin.

Derek Brower
The Senate seems likely to go . . . No. The Senate will go Republican, seems likely to go Republican. It seems likely. There are a bunch of other races that, you know, they could . . . depends on the size of what they get majority and so on. Or maybe they don’t. Who knows? But that’s the . . . That’s kinda the least controversial claim.

The House is different. The House, I think the Democrats are hopeful in the House, partly because they happen to be running against a bunch of swivel-eyed lunatics and some really, really weird candidates who I think by and large have disgraced the Republican caucus. Some of them are running again. You know, George Santos, this absolute kind of…

Robert Armstrong
Yeah. Unbelievable story.

Derek Brower
Unbelievable story, yeah.

Robert Armstrong
So he’s gone.

Derek Brower
He’s gone. There are others who are, you know, there are a lot of moderate Republican so-called moderate Republicans in New York State, for example, who won seats in kind of marginal Democratic areas who are in a bit of trouble this time, I would say. So the Democrats are more hopeful there. So it’s very possible that you get a split in Congress, which makes it difficult for Trump.

Robert Armstrong
OK. So that’s the most likely outcome, which makes it more difficult for Trump to achieve . . . But there is a chance.

Derek Brower
If he’s gonna legislate for stuff.

Robert Armstrong
There is a chance that he could, by executive fiat or whatever they call it, he could impose quite stringent tariffs.

Derek Brower
Yes. Well, I think it’ll . . . There’ll be lawsuits and there’ll be challenges. But there is . . . It is . . . That is disputed. But yes, I think that’s what he thinks he can do and he will definitely try it that way.

Robert Armstrong
The reason I press you on this is because the Wall Street consensus that Trump is the inflation candidate strikes me as a little too pat and possibly biased. I don’t know if people outside of the Wall Street world know this, but Wall Street is relatively Democratic. It’s a New York institution. It’s quite blue. And also New Yorkers, who a lot of Wall Street people are, find Trump vulgar and unattractive and they don’t invite him to their dinner parties. Right? So there’s a certain amount of New York snobbery involved too, which would naturally incline people who work on Wall Street to like a story in which Trump screws things up and generates inflation.

So I wonder if they are exaggerating the risks of a Trump presidency: of very high deficits, of stringent tariffs and of big crackdowns on immigration.

Derek Brower
I don’t have a dog in this fight, as you can tell from my accent. But what I would say is there are a bunch of surrogates out there: you know, Howard Lutnick, Cantor Fitzgerald guy; Scott Bessent, ex-Soros guy; John Paulson, hedge fund guy. You know these donors, big donors, more powerful . . . 

Robert Armstrong
So these are big money Wall Street people.

Derek Brower
Right, of Trump and they are . . . I think their message to the Street is a bit more plain vanilla: that he’s not gonna be . . . his bark is gonna be worse than his bite on tariffs.

Robert Armstrong
Yeah. Bessent, we had a piece on him in the FT and as far as I could tell, his claim was that Donald Trump is secretly Ronald Reagan.

Derek Brower
Right. Exactly. (Robert laughs) I mean, everybody, this is the thing with Trump, by the way. Everybody everybody kind of projects their wishes on to this . . . 

Robert Armstrong
Sees the Trump they want to see.

Derek Brower
 . . . because he doesn’t really believe in anything or he doesn’t . . . I don’t think . . . I think it’s pretty safe to say he doesn’t think deeply about these things. He just thinks instinctively and so people project onto them what they think he’s kind of like.

But then on the other hand, you have JD Vance, who is pro-Lina Khan. He is a protectionist. So there is an argument that he will have a lot of influence in the administration and he is a true believer, so they say, in this kind of protectionist stuff. But that’s the tariffs thing. And then…

And by the way, on the inflation side and on the supply side and whether he’s inflationary, let’s not forget that what nobody’s talking about is pumping like trillions of dollars into the economy like has just happened, which was the kind of source of the inflation, one could argue.

So Trump could be held back a bit by Congress. He could be less severe. I’m just kind of making building the case here, not necessarily agreeing with it. He could be less severe than the language suggests.

And then he also is really, really, really focused on trying to bring down energy costs, which are an expensive input and have been super expensive for a period of time. I think like gasoline prices are 40 per cent higher, have been 40 per cent higher under Joe Biden or they are now than when he took office, and they’ve been going up and down.

Robert Armstrong
Yes. They’ve been coming down now. They’re under $4, which is kind of the magic level now.

Derek Brower
Yeah. $3 about in New Jersey, right?

Robert Armstrong
Yeah. So that’s a bit better. But they had been high.

Derek Brower
It’s better, but they’re higher. I mean they were much lower under Trump. Energy costs were lower. He went through . . . I mean, he oversaw or he was president while there was a historic oil price crash. So that kind of helped. (Robert laughs) Thanks. Oil prices literally cost like was negative for a while, the oil price, so that helped bring down the energy costs in the economy. And there was a pandemic, etc, etc. So it’s not kind of a fair comparison. But he does focus on bringing down energy costs, which he thinks have been inflationary.

Robert Armstrong
Yeah. So he probably right.

Derek Brower
He’s probably right. So . . . 

Robert Armstrong
Puts and takes.

Derek Brower
Is he gonna be as inflationary or not? I mean, it’s debatable.

Robert Armstrong
So let’s try to wrap up this discussion. I think we’re talking about a lot of things that are kind of on a knife edge or a margin. But let’s kind of go through and sum up. One, the polls have gotten a little stronger for the Republicans.

Derek Brower
A little bit.

Robert Armstrong
A little bit.

Derek Brower
All within the margin of error. With huge uncertainty. Anybody calls it right now is an idiot.

Robert Armstrong
Yeah. OK. (Laughter) That’s very clear.

Derek Brower
Seriously.

Robert Armstrong
The betting markets are strongly Trump, but we’re sceptical, OK? That’s number two. And the Wall Street consensus that Trump is the inflation candidate might be a little too simplistic. Let’s go through just summarising the reasons for that.

Derek Brower
Yeah. So on the first one, you want me to go through all three of them?

Robert Armstrong
Yeah. You were just saying.

Derek Brower
On the first one — look, on the polling, I would say I’m so uncertain about it that you could see a blue sweep, ie, Harris could sweep all of the swing states or you could see Trump do it. But the only thing that I trust as a journalist, as an editor who’s been sending people out across the country for months, is our reporting. And our reporting has felt a bit more Trumpy than Democratic. That’s what I would say. I’ve been sending reporters into areas and they come back and say, ooh, it’s Trumpy.

Robert Armstrong
But we still might get divided government. The chance of divided government are high. That’s kind of the central hypothesis which softens Trump’s ability to do the kind of supply-restricting things he’s trying to do, right?

Derek Brower
Yeah. And he’s an extremist in his language constantly. Whether he lives up to that — and we’re not talking about the democracy stuff, we’re just talking about the financial side — whether he lives up to that is yet to be seen. Like he’s . . . I think we need to be very cautious about believing that America is going to impose a zillion tariffs on everybody.

Robert Armstrong
And throw out 20mn.

Derek Brower
And throwing out 20mn immigrants or illegal immigrants. Logistically, this is gonna be super, super hard. And that’s not even contending with all the Wall Street and corporations up in arms and bending his ear to stop him doing this. It’d be really, really hard. Again, not going into the morality or the ideology of this; just logistically moving that many people will be something that has never really been undertaken by a normal democracy before and will be hugely controversial, not to say awful for a lot of communities and so on, but logistically very, very difficult.

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Robert Armstrong
All right. On that note, we will be right back with Long and Short.

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This is Long and Short, that portion of the show where we go long things we like and short things we don’t like. I’m long something today, Derek.

Derek Brower
What?

Robert Armstrong
I’m long Coca-Cola. So Coca-Cola is . . . 

Derek Brower
Not McDonald’s?

Robert Armstrong
I’m also long McDonald’s, but I’m long Coca-Cola because their results, their quarterly results came out yesterday or the day before. And once again, they got 10 per cent revenue bump in the United States from price. People will just pay whatever Coca-Cola asks them to pay for this bubbly, sweet liquid. It is unbelievable. Inflation may be dead in America, but it’s not dead on Coca-Cola. And I just think that this is an incredible brand.

Derek Brower
Can I be like a classic long/short hedge fund and go both? I’m gonna be long John King on CNN, who’s their guy who does the maps and says, now Miami-Dade’s vote count is coming in. Because he’s gonna be around for a long time, over many days from November 5th. And that’s the reason, that’s my other short, which is that I’m short that the election is gonna be over on November 5th because there’s . . . I mean, even in Pennsylvania, which is the key swing state, it’s gonna take a while.

Robert Armstrong
It’s gonna go on forever. And what’s interesting . . . 

Derek Brower
We may never know who the next president is.

Robert Armstrong
I was talking to a markets person the other day, you know, off the record and he said generally, after an election is resolved, stocks just go up. It doesn’t matter who wins. It’s like the uncertainty is taken out of the market. So it’s good after an election is decided. It’s good to be long the market for a month or so.

But he was like, that’s not gonna happen this time because we’re not gonna get a resolution. And that’s gonna be rough for markets. He said the only thing that will make markets go up is a Kamala concession. Not because Kamala losing . . . 

Derek Brower
Right. It would just be certainty.

Robert Armstrong
It would just be certainty. And that’s the only scenario in which we get certainty anytime soon.

Derek Brower
What if Trump comes out and says, oh, fair and square. You guys did it to me again. Way to go, guys, you know.

Robert Armstrong
(Laughter) every vote is (inaudible).

Derek Brower
Go, America. I’ve never seen a fairer election.

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Robert Armstrong
On that completely fantastical idea, listeners, we will be back in your feed next week.

Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.

FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.

I’m Rob Armstrong. Thanks for listening.

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