In response to a surge in President Donald Trump's popularity following last week's debate, financial giants including Goldman Sachs, Morgan Stanley, and Barclays are reevaluating the potential impact of a Trump victory on the bond market. As a result, Wall Street strategists are advising clients to prepare for increased inflation and higher long-term bond yields.

Morgan Stanley strategists, including Matthew Hornbach and Guneet Dhingra, have recommended that clients position themselves for rising long-term interest rates relative to short-term rates. They argue that now is the opportune time to make such a wager. The rise in Trump's poll numbers since the debate suggests the need for consideration of economic policies that could spur additional rate cuts from the Federal Reserve. Additionally, a Republican sweep in the election could lead to fiscal expansion, putting upward pressure on longer-term bond yields, according to Morgan Stanley.

Barclays suggests hedging against inflation as the best response to the increasing possibility of a Trump victory. Strategists Michael Pond and Jonathan Hill propose a bet that five-year Treasury inflation-protected securities (TIPS) will outperform standard five-year notes. This approach aims to safeguard against potential inflationary pressures.

Buy-side investors, such as Jack McIntyre from Brandywine Global Investment Management, are taking notice of these predictions. McIntyre expressed concern that bond vigilantes, those who take actions to influence bond markets, may react early due to the debate fallout. McIntyre believes that a combination of factors such as Biden's performance, weaker data, and higher oil prices could increase the odds of a Republican sweep in November.

As a consequence of the growing likelihood of a Trump re-election, US Treasuries experienced a decline on Monday, resulting in yields reaching their highest levels in over a week. Traders attribute this ongoing fallout to the recent bump in the odds of a second Trump term. The losses in Treasuries were most evident in longer-term maturities, with 30-year bonds seeing an increase of over eight basis points to 4.65%, the highest level since May 31.

Nevertheless, not everyone on Wall Street is convinced that higher long-term Treasury yields and steeper yield curves are unavoidable. Goldman Sachs strategists led by George Cole and William Marshall believe that the consensus expectation for a term premia-driven sell-off may not hold true. They argue that investor focus may shift away from fiscal spending towards the risks associated with higher tariffs, which could negatively impact productivity and growth as the election approaches.

Acknowledging the uncertainty surrounding the makeup of Congress after the November election, Kathy Jones, chief fixed-income strategist at Charles Schwab, warns that assumptions about the impact of Trump's policies on the markets remain precarious. Jones emphasizes that the biggest risk to the Treasury market is a potential shift in the narrative regarding post-election policies, as candidates must navigate their proposed plans through Congress to implement change.

In conclusion, as Donald Trump's election prospects rise, Wall Street is bracing itself for potential changes in the bond market. Expectations of sticky inflation and higher long-term bond yields have prompted financial giants to reassess their strategies. Traders are urged to position themselves for rising long-term interest rates, hedge against inflation, and be prepared for potential market fluctuations depending on the outcome of the election.