(Bloomberg) -- Treasuries slipped on Tuesday after a strong report on services ahead of Thursday’s Federal Reserve interest-rate decision added to volatility around the US election.
As traders awaited the closing of polls later in the evening, the 10-year was steady at 4.29% after a spike to a session high of 4.36% before the auction. The two-year yield was 4 basis points higher at 4.20% late in New York, and down from a earlier multi-month high around 4.24%. Early declines were pared after an auction of 10-year notes at the highest yield level since June drew good demand.
With strategists and investors warning of outsized swings no matter the outcome of the US presidential vote, a measure of bond volatility closed on Monday at the highest in more than a year.
“Investors are braced for turbulence in the Treasury market, even allowing for the big moves that we’ve already seen,” John Higgins, chief market economist at Capital Economics wrote in a note. “Even though we still think there is ample scope for a sizable repricing in bonds once the outcome is clear, it’s by no means certain that the government bond market will seesaw by as much as investors are currently anticipating.”
The US presidential race is deadlocked, with polls showing Americans narrowly split between former President Donald Trump and Vice President Kamala Harris. That sets the stage for market turbulence, especially if the elected president’s party also takes both houses of Congress.
The ICE BofA MOVE Index, a measure of expected fluctuations in yields, reached the highest level since October 2023 on Monday. Trading in options on interest-rate swaps Tuesday suggested the outlook for volatility will stay high. And rate strategists at Citigroup Inc. said options on Treasury futures were priced for a move of 22 basis points in 10-year yields by Friday, the highest election-week premium since 2012.
Yields across most maturities remained higher by at least two basis points after the $42 billion auction, with short-dated tenors rising most. Demand for the 10-year notes was better than for a sale of three-year debt on Monday.
The auction yield was 4.347%, slightly below where the 10-year notes were trading just before 1 p.m. New York time, the bidding deadline, a sign that demand exceeded expectations. On Wednesday the department will sell $25 billion in 30-year notes, completing its coupon-bearing debt sales for the week.
Tom di Galoma, head of fixed income at Curvature Securities, sees the 10-year yield heading higher after the election, to around 4.75% or as high as 5%, given that both presidential candidates are likely to push a pro-growth agenda that inflates the US deficit.
The US service sector expanded in October at the fastest pace in over two years, fueled by a pickup in hiring, the latest sign since the Fed cut rates by a half point in September to cast doubt expectations it will lower them by another 100 basis points by the end of next year.
The Fed’s next policy meeting concludes Thursday, and swaps traders are pricing in an over 90% probability the central bank reduces rates by a quarter-point.
What Bloomberg Strategists say..
“While a win for Kamala Harris may herald lower yields in the immediate aftermath, given how much bonds have sold off in the past month, it also shouldn’t be a surprise if investors who are short Treasuries take some money off the table if Donald Trump wins.”
Ven Ram, cross-asset strategist. Read more on MLIV.
The Bloomberg Dollar Spot Index fell as much as 0.4% to a two-week low. Currency volatility jumped, boosting the cost of hedging the euro against the greenback to the highest in more than four years.
The currency’s overnight implied volatility — the cost of buying protection against upcoming moves — surged on Tuesday and is headed for its biggest daily jump since 2008.
For weeks, betting markets were leaning toward a Trump victory and traders positioned for his low-tax and high-tariff policies to fuel growth and inflation. The so-called Trump trade boosted the dollar to the strongest level in almost four months and brought the 10-year Treasury yield to 4.38% last week from about 3.6% in mid-September.
But markets scaled back those wagers after a weekend poll cast doubt on Trump’s potential victory. A Des Moines Register/Mediacom Iowa poll showed Harris with a three percentage-point lead in the state Trump previously won twice by comfortable margins.
--With assistance from Michael Mackenzie, Vassilis Karamanis and Alice Atkins.
(Updates yield levels.)
©2024 Bloomberg L.P.