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‘Trump Trade’ Doubts Drag on Dollar, Boosting US Treasuries

Strategist John Stoltzfus explains whether investors should take action ahead of the U.S. election or wait out for election results.

(Bloomberg) -- Treasury yields declined and the dollar weakened as investors pared bets on Republican Donald Trump prevailing in Tuesday’s US presidential election.

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The yield on 10-year Treasuries dropped as much as 12 basis points to 4.26% in US trading after a new poll suggested traders were underestimating the prospect of a win for Democrat Kamala Harris. The Bloomberg Dollar Spot Index slid as much as 0.7%, while the Mexican peso — which has suffered from Trump’s talk of tariffs — was one of the biggest gainers among major currencies. Bitcoin, which has climbed on Trump’s support of cryptocurrencies, slipped.

The moves signal a re-evaluation of so-called Trump trades after polling data cast doubt on that result. A Des Moines Register/Mediacom Iowa poll showed Harris with a 3 percentage-point lead in the state over Trump, and could be a bellwether for how Harris performs in nearby Wisconsin — one of seven swing states. Still, an NBC News poll released Sunday showed the race remains deadlocked.

Treasuries and the dollar trimmed some of their gains during the New York session as the market awaited Election Day. The Bloomberg gauge of the greenback was on track for its biggest drop since September.

“We are operating with a premise — the Senate leans Republican, House is a coin toss,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “So a Harris win with that premise means more price action like today,” with yields falling and the curve flattening, he said. In the event of a Trump win and the same backdrop for Congress, the curve steepens as yields rise, he said.

In recent weeks, investors have been betting on a Trump win, positioning for his low-tax and high-tariff policies to boost both growth and inflation. Those bets helped push the dollar gauge to a four-month high last week and sent yields on 30-year Treasuries to their highest since July, creating a steeper yield curve.

Monday’s activity in US interest rates, by contrast, included traders exiting Treasury option trades that targeted higher longer-dated yields and a steeper curve. There was also demand for new positioning targeting a bond-market rally dropping 10-year yields back below 4%.

“Into tomorrow’s event, markets will continue to lighten up on the profitable Trump trade of October — firmer US dollar and higher yields and a steeper Treasury curve — and de-risk where they can to allow themselves to react in the early morning of Wednesday,” said Jordan Rochester, head of macro strategy in EMEA for Mizuho.

Meanwhile, emerging-market investors had been bracing for the fallout of a potential Trump victory, as his plans to enact tariffs would weaken those countries’ exports and demand for their currencies. The Mexican peso, one of the most vulnerable to the threat of tariffs, rose as much as 1.6% against the greenback on Monday. And the onshore yuan gained as much as 0.6%, the most since August.

“As we move closer to the US election there is less confidence that Trump will win the election,” said Lee Hardman, a senior currency analyst at MUFG. “A Trump win and Red Sweep would be the most bullish outcome for the US dollar, while a Harris win with a divided Congress could see the US dollar quickly giving back last month’s strong gains.”

A red sweep refers to Republicans winning the presidency and both houses of Congress.

The latest polls also impacted betting platforms like PredictIt. On that, a Trump win was seen as around a coin-toss, down from 60% last week.

“Markets are pricing in a higher chance of a Harris win now,” said Carol Kong, a strategist at Commonwealth Bank of Australia. “That means the scope for dollar strength is now higher in the event of a Trump win.”

That said, the US election is far from the only risk that traders must navigate this week.

Markets have been whipped around by changing expectations for interest-rate cuts by the Federal Reserve, with markets seeing a roughly 8% chance that the Fed keeps monetary policy steady when it meets Thursday. Just a few weeks ago, traders were debating whether the central bank might again cut rates by a half-point at either its November or December meeting.

Bond markets will also have to contend with a trio of Treasury auctions this week. After Monday’s sale of three-year notes, next up are the 10- and 30-year sales on Tuesday and Wednesday.

The $58 billion three-year sale was awarded at the highest yield since July, and nearly a basis point higher than the pre-deadline bid.

--With assistance from Michael G. Wilson, Jiyeun Lee, Michael Mackenzie, Carter Johnson and Mark Tannenbaum.

(Adds quote in fourth paragraph and updates yield levels)

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