US yields hit three-month high on election hedging
Corrects Fed outlook in first paragraph
By Karen Brettell
NEW YORK, Oct 22 (Reuters) -U.S. Treasury yields hit a three-month high on Tuesday as hedging before the November 5 U.S. elections and expectations for a less dovish Federal Reserve dampened demand for the U.S. government debt.
Shifting momentum towards a more likely Donald Trump presidency has weighed on bonds, with Trump policies including tariffs and restrictions on undocumented immigration expected to increase inflation.
A sharp sell-off in bonds on Monday “was partly driven by the prediction markets' pricing in higher odds of a Trump victory,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
Betting site Polymarket on Tuesday shows Trump as having 64% odds of winning the presidency, compared to 36% for Kamala Harris.
“Tariffs and crackdowns on immigration would be stagflationary shocks,” Goldberg said, adding that “very likely you'll see the inflationary impact first because it feeds through the data much faster.”
The U.S. budget deficit is also expected to worsen under a presidency by either Trump or Harris, which could lead to increases in Treasury supply next year.
A much stronger than expected employment report for September has also sent yields higher as investors to price out the probability that the U.S. central bank will make further large interest rate cuts. The Fed cut rates by 50 basis points last month.
Traders are now pricing in 42 basis points of cuts by year-end, indicating a less than certain chance that the Fed will make 25 basis point cuts at each of its coming two meetings. FEDWATCH
Benchmark 10-year note yields US10YT=RR were last up 0.2 basis points at 4.184% after earlier reaching 4.222%, the highest since July 26.
The yields are facing technical resistance at around 4.17%-4.18% including the 200-day moving average and the 50% Fibonacci retracement of the fall in yields from April to September.
Two-year note yields US2YT=RR rose 0.1 basis points to 4.026%.
The yield curve between two-year and 10-year notes US2US10=TWEB flattened slightly to 15.4 basis points.
The Treasury Department will sell $13 billion in 20-year bonds on Wednesday and $24 billion in five-year Treasury Inflation-Protected Securities on Thursday.
Reporting By Karen Brettell, Editing by Nick Zieminski
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