'Trump trade' could reverse on signs Trump would lean hawkish on fiscal policy

Investing.com -- Reports that a second potential Donald Trump presidency could include fiscal hawks in his administration focused on aggressively cutting fiscal spending, threatens to shift and reverse the 'Trump trade,' pushing Treasury yields lower, analysts at Macquarie said in a recent note.

"If deficit reduction via spending control starts to get some traction as a more serious proposal under a Trump administration that contains deficit hawks, then yields may decline a bit more," Macquarie analysts noted. "In effect, the nature or interpretation of the 'Trump trade' could shift and reverse, and yields could fall."

Recent media press has highlighted how a Trump administration might adopt aggressive fiscal spending reduction programs to shrink the US deficit. The Wall Street Journal on Wednesday suggested that John Paulson, who is close to Trump, could be vying for the position of US Treasury Secretary with plans to enact "massive" federal spending cuts.

That followed reports earlier this week about Elon Musk serving in Trump’s cabinet too, and his pledge to cut “at least USD 2 trillion” from federal spending.

This potential shift in fiscal policy contrasts with current market expectations. Many investors have been positioning for increased fiscal spending and higher inflation under a second Trump term, driving up Treasury yields.

But now these expectations might be misplaced, Macquarie warns, suggesting that it be time to "tactically take profit on payer positions in swaps, or cover short UST bond positions" in light of this potential policy shift.

At a time when Trump's implied probability of winning on betting markets remains high at 67%, these "potential policy shifts could have significant market implications," the analysts said.