‘Trump trades’ wind down as US bond yields fall heading into election

Gertrude Chavez-Dreyfus
| Reuters

NEW YORK, Nov 4 (Reuters) – U.S. Treasury yields fell across the board on Monday as traders leveled positions ahead of Tuesday’s presidential election, thanks in part to a new opinion poll that showed Democratic nominee Vice President Kamala Harris holds a surprise lead in Iowa over former Republican President Donald Trump.

In afternoon trading, the U.S. 10-year yield fell 6.6 basis points (bps) to 4.297% US10YT=RR, its biggest daily fall in two months.

At the short end of the curve, the 2-year US Treasury yield fell for the first time in six days, down 3.7 bps. up to 4.166% US2YT=RR. It was the biggest one-day decline in about three weeks.

However, Treasury yields offset losses after an auction of three-year U.S. bonds priced above expectations, suggesting market participants were demanding a premium for selling the bonds. Analysts said the result was expected given the uncertainty surrounding Tuesday’s elections, which left many market players on the sidelines.

“The bond market is trying to position itself ahead of the election in terms of who it thinks will win. The only thing that happened was less toward Trump and more toward Harris,” said Jim Barnes, director of fixed income. at the Bryn Mawr Trust in Berwyn, Pennsylvania.

“We’ve had some revaluation of yields… that’s due to the fact that economic data is coming in better than expected. investors’ expectations regarding the outcome of the presidential election,” Barnes added.

US bond yields have risen in recent weeks as investors bet that Trump will become president again.

The current market consensus is that Trump’s policies on immigration, tax cuts and tariffs will put upward pressure on inflation, bond yields and the dollar. Since early October, the benchmark 10-year yield has risen about 57 bps.

Part of that rise in yields was driven by economic data that was better than many had feared, causing markets to re-evaluate expectations about the path ahead for the Federal Reserve to cut rates.

However, JPMorgan analysts said the recent 21 bps rise in 10-year yields. was driven by expectations that Republicans could win the presidency and both houses of Congress.

A weekend poll showed Harris leading Trump 47% to 44% in Iowa, a state that has trended deeply Republican in recent years. The poll has a margin of error of 3.4 percentage points. Other polls show the race in the seven battleground states expected to determine the outcome was similarly tight.

Fed meeting this week

The Federal Reserve meets this week and is expected to cut rates by 25 basis points at the end of its two-day meeting on Thursday. But the Fed has taken a backseat as the bond market is more focused on the election.

“I think a lot of positions in bond portfolios have been cut because of the potential volatility associated with the election,” said Brendan Murphy, head of North American fixed income at Insight Investment in Boston, which has $838.1 billion in assets under management. dollars.

For other maturities, the US 30-year bond yield fell 7.2 bps. up to 4.486% US30YT=RR.

US three-year yields fell 4 bps. to 4.139% US3YT=RR after a soft auction on short-term bonds. The three-year bond was priced at 4.152%, above market expectations at the time of filing. It was also the highest harvest since July.

According to Action Economics, direct bidders received only 9.6% of the offer, more than a third of the amount received in the previous auction (24%) and about half of the average of 18.6%.

The US yield curve, meanwhile, has flattened, with the gap between the two-year and 10-year bond yields amounting to 13.1 bps. several weeks.

A “bullish equalizer” is a scenario in which long-term rates fall faster than short-term rates, which could reflect “flight to safety” trades as the election approaches on Tuesday.

On Tuesday, the US Treasury will hold its next auction of $42 billion in 10-year notes. The Treasury said in its refund announcement last week that it does not expect bill and bond auctions to increase in size for at least the next few quarters.

Polymarket election odds – minute by minute https://reut.rs/3NVba7M

US yield curve https://reut.rs/3C6J0Us

Reporting by Gertrude Chavez-Dreyfus; Additional reporting by Alan John in London; Editing by Amanda Cooper and Will Dunham.