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US bonds underpinned one day before close elections

usqweLONDON: US Treasuries rose on Monday as investors sought safety in lower-risk markets one day before uncertain presidential elections and as Greek worries returned to the forefront of investors' minds.


US 10-year government bond yields fell 2.3 basis points to 1.69 percent but remained well within the 1.5-1.9 percent range which has held since September.


Investors have been reluctant in recent weeks to put on big positions before the vote on Tuesday, with the race between President Barack Obama and Republican challenger Mitt Romney close.


The elections will take place in the wake of a devastating storm that slammed into the US East Coast last week, leaving at least 113 people dead in the United States and Canada.


"A lot of people are risk averse, people aren't really exposed one way or another not only to see how the storm passes - what it means for the future growth of the United States and how it's handled - but also (because of) the election process," Craig Collins, trader at Bank of Montreal said.


"Greece is very much again in the headlines and the knock-on effect has been peripherals wider and core bonds benefiting," he said, referring to this session's rise in the premium investors require to hold lower-rated debt compared to equivalent German Bunds.


The Greek government presents to parliament on Monday an unpopular austerity package which must gain approval in a vote on Wednesday to keep international aid payments on track and stave off the threat of bankruptcy.


Five-year yields fell 1.6 basis points to 0.71 percent and thirty-year borrowing costs shed 2 basis points to 2.89 percent.


Analysts are divided on the impact an Obama versus Romney victory would have on financial markets.


Some argue that equities would rally at the expense of safe-haven bonds on the back of a conservative government which tends to favour tax cuts. Others say that a Romney victory would raise fears that the Federal Reserve's expansionary monetary policy would be unwound, so that stocks would rally if Obama won.


Another key factor for the market is how the next government handles the so-called fiscal cliff, with about $600 billion in government spending cuts and higher taxes set to kick in from Jan. 1 unless Congress reaches a long-term pact to cut the US budget deficit.


"The market is leaning already towards an Obama victory, so a Romney victory would be more of a surprise and therefore would have a stronger impact on the (Treasury yield) curve," Richard McGuire, senior fixed income strategist at Rabobank said.



Copyright Reuters, 2012



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