Investors prepare for higher Treasury yields as election looms
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The prospect of a Democratic sweep in next month’s elections is helping to push U.S. government-bond yields higher, stirring memories of four years ago when yields climbed sharply after a Republican victory.
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Yields, which rise when bond prices fall, have climbed in recent days as polls have shown a growing lead for former Vice President Joe Biden over President Trump, as well as improving chances that Democrats could end up holding both houses of Congress.
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For debt investors, the key isn’t necessarily whether Mr. Biden or Mr. Trump wins. It is whether one party or another has unified control of government, making it easier to expand the federal budget deficit through tax cuts or spending programs.
Bigger deficits can push yields higher for two reasons: first, by increasing the supply of outstanding bonds as the government ramps up borrowing and, second, by potentially boosting economic growth and inflation, which makes bonds less attractive.
The improving poll numbers for Democrats in November dovetailed last week with renewed discussion in Washington about another round of coronavirus relief aid before the election. That gave investors a double-dose of stimulus hopes, though prospects of a pre-election bill appeared to dim over the weekend.
As of Friday, the yield benchmark 10-year U.S. Treasury note stood at 0.775%, up from 0.644% before the presidential debate on Sept 29. The yield on the 30-year bond has climbed even more, to 1.573% from 1.404%. But some investors see room for a bigger rise, which could have repercussions on other assets like stocks and gold that have benefited from ultralow yields.
For investors, “this election is about the implication for fiscal policy,” said Thanos Bardas, global co-head of investment-grade securities at Neuberger Berman. The 10-year yield, he added, could in time “go to 1.3% easily on a full sweep” by Democrats.
Investors can’t take any scenario for granted. In 2016, few predicted Mr. Trump’s victory or how the market would respond. This time, polls suggest that Republicans could hold on to the Senate even if they lose the White House, a potential recipe for legislative gridlock.
Any number of other events, such as the approval of a coronavirus vaccine or a marked slowdown in the economic recovery, could also diminish the importance of the election.
Bardas, for one, said his team wasn’t making any big bets on the path of Treasury yields, in part because investors could pile into bonds if the outcome of the election is contested or uncertain.