US yields fall as elections produce divided US Congress

NEW YORK: US Treasury yields fell on Wednesday as elections for federal lawmakers split control of the US Congress between the two major political parties, leaving investors to assess its impact on government spending and borrowing in the coming year.

As expected, the Democrats gained control of the House of Representatives, while Republicans increased their majority in the Senate. Analysts expect political gridlock that would hamper passage of major fiscal measures.

"It's going to be more difficult to pass legislations," said Gene Tannuzzo, senior portfolio manager at Columbia Threadneedle in Minneapolis.

US legislators will face an ever growing federal deficit funded by more borrowing.

The Treasury Department will complete its final leg of this week's $83 billion quarterly refunding with a record offering of $19 billion in 30-year bonds at 1 p.m. (1800 GMT).

This series of debt sales is expected to bring an additional $28.7 billion to the federal coffers.

Analysts projected solid demand for the 30-year issue following a strong showing for the record amount of 10-year notes sold on Tuesday.

"The talk has been larger supply means higher yields, but we haven't seen that," Tannuzzo said. "The long-end has held up quite well."

In "when issue" activity, traders expect the 30-year bond supply to sell at a yield of 3.390 percent, which would be its highest yield at an auction since August 2011, Tradeweb data showed.

On the open market, benchmark 10-year Treasury yield was down over 2 basis points at 3.189 percent. It traded as high as 3.250 percent earlier Wednesday, just a shade below a 7-1/2 year peak of 3.261 percent reached nearly a month ago.

Borrowing costs for the government and private sector will likely head higher as the Federal Reserve is expected to raise short-term interest rates and shrink its balance sheet more.

Fed policymakers begin a two-day meeting on Wednesday. They are expected to leave the US central bank's benchmark overnight lending rate unchanged in a range between 2.00 percent and 2.25 percent.

The futures market implied they will raise rates for a fourth time in 2018 at their Dec. 18-19 policy meeting.