Fed Gathering Imminent
As the trading day progressed, the key U.S. 10-year Treasury yield saw a notable decrease of 6.6 basis points, dropping to 4.297%, marking the largest single-day decline in two months. On the shorter end, the U.S. two-year Treasury yield decreased for the first time in six sessions, down by 3.7 basis points to 4.166%, setting the stage for its most significant drop in about three weeks.
Despite this, Treasury yields slightly recovered their losses following a U.S. three-year note auction that fetched higher prices than anticipated. This suggests that investors demanded a higher return for the purchase, a move analysts had predicted due to the uncertainties surrounding the impending Tuesday election, causing many to stay away from making big moves.
“The bond market is adjusting its positions in anticipation of the election results, trying to gauge the potential winner,” explained Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania. “There was a noticeable shift in market direction, moving away from Trump and leaning towards Harris,” he added.
Barnes also noted that the recent adjustments in yield prices were a response to unexpectedly positive economic data. “Yields were poised for a pause, and the anticipation surrounding the election outcomes has acted as a trigger for these adjustments,” he continued.
Recently, U.S. yields had been climbing as traders speculated on the possibility of Trump’s re-election, which is believed to potentially lead to policies that could increase inflation and, consequently, bond yields and the dollar. Since the beginning of October, the benchmark 10-year yield has risen approximately 57 basis points.
This increase is also partly due to economic data turning out better than many had feared, leading to a reevaluation of expectations regarding the Federal Reserve’s interest rate trajectory. Analysts at JPMorgan noted that about 21 basis points of the recent rise in the 10-year yields could be attributed to the expectations that Republicans might secure the presidency and both chambers of Congress.
A recent poll indicated Harris holding a slight lead over Trump in Iowa, at 47% to 44%, a state that has recently shown strong Republican leanings. This poll falls within a 3.4 percentage point margin of error. Other surveys suggest a tight race in the seven key battleground states likely to determine the election’s outcome.
The Federal Reserve is set to convene this week, with expectations of a 25-basis point cut by the meeting’s conclusion on Thursday. However, the focus of the bond market has largely shifted towards the election, overshadowing the Fed’s potential actions.
“In light of the upcoming election, many bond portfolio positions have been scaled back to brace for potential market volatility,” stated Brendan Murphy, head of fixed income, North America, at Insight Investment in Boston, which manages assets totaling $838.1 billion.
In other developments, U.S. 30-year yields decreased by 7.2 basis points to 4.486%, while the three-year yields dropped 4 basis points to 4.139% following a muted auction of the shorter-term note, which closed at a yield of 4.152%—the highest since July.
Direct bidders claimed just 9.6% of the offering, a significant drop from the previous auction’s 24% and about half of the 18.6% average, as reported by Action Economics.
Meanwhile, the U.S. yield curve experienced a bull flattening, with the spread between the two-year and 10-year yields narrowing to 13.1 basis points from 17.2 bps on Friday. This change suggests a temporary reversal of the recent steepening trend, possibly indicating a move towards safer investments as the election approaches.
The U.S. Treasury is set to auction $42 billion in 10-year notes on Tuesday. In its last week’s refunding announcement, the Treasury stated that it does not foresee an increase in auction sizes for notes and bonds for at least the next few quarters.
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
