US yields dip as ‘Trump trades’ unwind in tight presidential race

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Iowa poll shows Harris ahead of Trump, weighs on yields
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US 10-year yields on track for largest fall since early Sept. 4
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US two-year yields show biggest decline in three weeks
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US 2/10 yield curve bull flattens
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US Treasury three-year notes auction show weak results
By Gertrude Chavez-Dreyfuss
NEW YORK, – U.S. Treasury yields slid across the board on Monday, as traders squared up positions ahead of Tuesday’s presidential election due in part to a new opinion poll showing Democratic candidate Vice President Kamala Harris with a surprise lead in Iowa over Republican former President Donald Trump.
In afternoon trading, the benchmark U.S. 10-year yield fell 6.6 basis points to 4.297%, on track for its largest daily fall in two months.
On the short end of the curve, the U.S. two-year Treasury yield fell for the first time in six days, down 3.7 bps at 4.166%. That was on pace for its biggest one-day decline in roughly three weeks.
Treasury yields, however, pared losses after an auction of U.S. three-year notes priced higher than expectations, suggesting market participants demanded a premium to take down the note. The outcome was expected, analysts said, given the uncertain environment surrounding Tuesday’s election, leaving many market players on the sidelines. “The bond market is trying to position itself ahead of the election in terms of who it feels is going to win. The only thing that came out was less direction toward Trump and more direction toward Harris,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.
“We have had some re-pricing in yields … which comes from the fact that economic data has been coming better than expected. Yields are definitely positioned to take a breather, but that catalyst for that to go in the other direction was triggered by investors’ expectations of presidential election results,” Barnes added.
U.S. yields had risen in the past few weeks as investors put on trades betting Trump could be president again.
The current market consensus is Trump’s policies on immigration, tax cuts and tariffs would put upward pressure on inflation, bond yields and the dollar. The benchmark 10-year yield has risen about 57 bps since the start of October.
Part of this rise in yields has been down to economic data that has come in better than many had feared, causing markets to reprice expectations for the Federal Reserve’s rate cut path.
Yet analysts at JPMorgan said about 21 bps of the recent move higher in 10-year yields was accounted for by expectations that Republicans could win the presidency and both chambers of Congress. The weekend poll showed Harris leading Trump 47%-44% in Iowa, a state that has been trending deeply Republican in recent years. The poll is within the 3.4 percentage point margin of error. Other polling shows the race as tight in the seven election battleground states expected to decide the outcome.
FED MEETING THIS WEEK The Federal Reserve will meet this week with a 25-bp cut expected at the end of the two-day meeting on Thursday. But the Fed has become an afterthought with the bond market more focused on the election.
“I think a lot of positions in the bond portfolios have been pared down in front of the potential volatility surrounding the election,” said Brendan Murphy, head of fixed income, North America, at Insight Investment in Boston, which has assets under management of $838.1 billion.
In other maturities, U.S. 30-year yields fell 7.2 bps to 4.486%. U.S. three-year yields slipped 4 bps to 4.139% after a soft auction of the shorter-term note. The three-year note priced at 4.152%, higher than market forecasts at the bid deadline. It was also the highest yield since July.
Direct bidders took only 9.6% of supply, more than a third of the prior auction’s takedown of 24%, and roughly half of the 18.6% average, according to Action Economics.
The U.S. yield curve, meanwhile, bull flattened with the gap between two-year and 10-year yields at 13.1 bps, down from 17.2 bps on Friday, and unwinding, at least temporarily, the curve steepening in place for the last few weeks.
A bull flattener is a scenario in which long-term rates are falling faster than shorter-dated maturities, which can reflect flight-to-safety trades, with the election coming up on Tuesday. On Tuesday, the U.S. Treasury will next auction $42 billion in 10-year notes. The Treasury in its refunding announcement last week said it does not anticipate increasing auction sizes for notes and bonds for at least the next several quarters.
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