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Markets

US bond yields tumble on election uncertainty, scaling back of stimulus bets

  • The benchmark 10-year yield was trading at 0.80% , off session lows but well below five-month highs touched briefly during Asian trade at 0.945%.
  • Markets got what they really didn't want, with a lot of uncertainty this morning.
04 Nov 2020

LONDON: Long-dated US Treasury yields tumbled off five-month highs on Wednesday with the results of the US election too close to call, raising concern about prolonged uncertainty and casting doubt over the fate of a much-needed spending package.

This, together with a growing perception that the US Federal Reserve may have to do more to support an economy grappling with the coronavirus, sparked a rush into US Treasuries. Ten- and 30-year Treasury yields were last down around 8.5 basis points on the day, each in their biggest one-day drop since June.

The benchmark 10-year yield was trading at 0.80% , off session lows but well below five-month highs touched briefly during Asian trade at 0.945%.

Thirty-year US Treasury yields fell to 1.57%, while short-dated bond yields also fell but to a lesser degree .

"Markets got what they really didn't want, with a lot of uncertainty this morning," said Jim Leaviss, head of fixed income at M&G Investments in London. "For bond markets, no blue wave means no hugely redistributive fiscal policy, no infrastructure boom, even if Biden gets elected."

By early Wednesday, the race was down to a handful of states, and both President Donald Trump and Democratic rival Joe Biden had possible paths to reach the needed 270 Electoral College votes to win the White House.

Since mid-October, US long-term yields have risen rapidly as Biden's lead over Trump in opinion polls encouraged some investors to price in the chance of big fiscal spending in the case of a Democrat victory. However, Trump's lead in hotly contested Florida caused an unwinding of some of those bets.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes narrowed to 63 bps.

According to Tradeweb data, that gap was almost 9 bps narrower on the day, set for its biggest one-day tightening move since June.

That suggests investors expect less fiscal spending to fight the economic shock wrought by the COVID-19 pandemic as Trump's prospects for a second term improve.

Valentijn van Nieuwenhuijzen, CIO at NN Investment Partners in The Hague, said the most important driver behind the move in US Treasuries were signs that the Republicans would hold onto their majority in the Senate.

"With less fiscal stimulus the Fed will have to remain more dovish for longer and again, weighing on yields," he said.

Speculators' net bearish bets on US 30-year Treasury bond futures rose to a record high in the latest week, according to Commodity Futures Trading Commission data released on Friday, highlighting strong expectations in the run-up to the election for a spike in yields.