The U.S. election was supposed to pave the way for a sell-off in Treasuries. Yet the opposite has happened in a race that remains too close to call.
Treasuries jumped along with most other major government bond, as ballots tallied so far dashed expectations for a Democratic sweep and upended bets for major debt-financed stimulus spending. A victory claim by President Donald Trump only added momentum to the rally. With results in key states such as Pennsylvania, Michigan and Georgia likely to take time, uncertainty is poised to remain high.
Yields on the 10-year Treasury bond fell nearly 14 basis points, the largest daily drop in seven months, to 0.76% as Trump’s claims fueled concerns about a contested election. Those in Europe followed suit, with German 10-year yields sliding as much as five basis points to -0.67%.
“The short Treasuries trade is really coming back to bite,” said George Boubouras, head of research at hedge fund K2 Asset Management in Melbourne. “Investors are clearly pricing in a ‘no blue wave’ scenario,” a higher possibility of a Trump victory and a more fiscally conservative stance, he said.
The turnaround is putting at risk the record short positions in bond futures that leveraged investors had piled into in response to polls showing a likely win for Biden, and possible majority for Democrats in both houses of Congress. Volumes in Treasury futures — typically subdued during Asia hours — surged to around eight times normal levels, according to Bloomberg calculations.
Trump’s robust performance in key battleground states such as Florida and Ohio has driven the 10-year yield back from its highest level since mid-year. The benchmark sank back below its 200-day moving average as the vote counting progressed.
Yields on the 30-year bond fell as much as 17 basis points to 1.51% after Trump said he would ask the Supreme Court to intervene, even as several battleground states continue to count votes. S&P 500 futures briefly dropped on his claims, before reversing the decline.
“The close fight has raised the specter of contested elections and thrown doubts over fiscal stimulus,” said Eugene Leow, a fixed-income strategist in Singapore at DBS Group Holdings Ltd. “Depending on how messy things get, 10-year yields can drop to the 0.7%-0.75% area in the short-term.”
See here for more on Wall Street’s issuance forecasts.
Big Reversal
At one point, both bonds and stocks were surging in tandem, compounding recent concerns about a breakdown in the inverse correlation between the two asset classes, which could jeopardize the traditional 60/40 asset allocation strategy.
With some key states still hanging in the balance, including Pennsylvania and Michigan, markets may be at risk of still more reversals in the days and weeks to come. Biden was seen taking the lead in Wisconsin, albeit narrowly, boosting his chances.