As the 2024 election season heats up, investors and market analysts are turning their eyes to the potential impacts of a “red sweep” scenario. This hypothetical situation—where Republicans take both the White House and Congress—could significantly influence economic policy and, in turn, Treasury yields. Recent movements in the markets suggest that expectations of a red sweep have already begun affecting intermediate Treasury yields. Here’s a look at what that might mean for investors and why GSE preferred stocks are becoming a popular trade among professionals betting on a Trump comeback.

How Election Expectations Are Shaping Treasury Yields

Analysts estimate that around 21 basis points (bp) of the recent movement in intermediate Treasury yields can be attributed to changing election expectations in favor of a Republican sweep. If this scenario does play out, there’s potential for another 20 bp rise in 10-year Treasury yields. This is because a Republican-controlled government, especially under Trump, is expected to enact policies that could increase fiscal stimulus and potentially push inflation higher, putting upward pressure on Treasury yields.

On the other hand, a divided government—particularly one where Kamala Harris secures the presidency—would likely lead to a dip in Treasury yields. Such an outcome might reduce the likelihood of expansive fiscal policies, which, combined with market uncertainty, could lead to a more cautious approach by investors.

The GSE Preferred Play: Betting on Trump and a Red Sweep

One of the favored trades among market professionals who believe in a Trump comeback is going long on Government-Sponsored Enterprise (GSE) preferred stocks, particularly those of Fannie Mae and Freddie Mac. These stocks, already a niche but high-stakes investment, could see substantial gains if Trump pushes to release Fannie and Freddie from conservatorship.

Under conservatorship since the 2008 financial crisis, Fannie Mae and Freddie Mac have remained tightly regulated. However, advisors close to Trump have shown interest in reforming their status as part of a broader strategy to realize gains on Treasury equity. This is why GSE preferred prices have been moving in close alignment with prediction markets that favor a Trump victory. If Trump returns to the White House, it’s plausible that he would revisit policies aimed at ending conservatorship, unlocking value for investors in these preferred stocks.

Leveraging the GSE Preferred Trade

To capitalize on the potential for policy shifts under a Trump administration, some investors are leveraging their positions in GSE preferred stocks. The logic is straightforward: with the right momentum and policy support, GSE preferreds could benefit significantly from changes in conservatorship rules. A Trump-led government would likely prioritize measures to increase the value of these equities, aligning with their long-term goal of reducing federal involvement in the housing market.

For those with a strong conviction in a red sweep and Trump victory, a leveraged position in GSE preferreds offers a high-risk, high-reward play. As election day approaches, this trade could attract even more attention, especially if prediction markets continue to reflect favorable odds for Trump and the Republicans.

Investing in GSE preferreds is not without risk, particularly given the volatility surrounding election outcomes. However, for those who see a clear path for a Trump-led red sweep, this trade could prove lucrative if the predictions align with reality. Watching both Treasury yields and GSE preferred prices as election indicators can provide insight into the broader market sentiment, as investors gauge the likely outcomes of the 2024 elections. Whether betting on a red sweep or hedging with more conservative options, there’s no doubt that the stakes are high as election day approaches.