T-bills surge in turbulent trade on signs of tight election by Bloomberg

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(Bloomberg) – Treasuries have skyrocketed in volatile trading as early US election results suggested the presidential race could be near nationwide, disappointing expectations for a quick ruling and decisive.

The 10-year yield, which hit an almost five-month high of 0.94% at the start of trading in Asia, fell to 0.83%. Meanwhile, the 30-year rate fell to 1.63% after climbing to 1.75%, briefly pushing its spread on the 5-year maturity to the highest since 2016. The dollar gained.

The rally in Treasuries gathered pace as state-to-state earnings poured in, suggesting lower expectations of a broad Democratic victory that would pave the way for a significant debt-financed fiscal stimulus. The market was vulnerable to the turnaround – leveraged investors last week racked up a record short bet on bond futures. Now these positions, apparently based on a blue wave scenario, are in danger of being crushed.

“It seems that ultimate clarity on an outcome will take time – it means uncertainty and therefore risk aversion strategies,” said Patrick Bennett, head of macroeconomic strategy for Asia at the Bank. Canadian Imperial Trade in Hong Kong.

As the first polls closed in the United States on Tuesday night, investors braced for Democrat Joe Biden and his party to potentially sweep the U.S. election, a so-called blue wave. 10-year Treasury bill rates, a benchmark for global borrowing, have been rising since August on expectations of a Democratic sweep.

Great overthrow

But signs of a tight race in states such as Florida, where President Donald Trump held a narrow lead, have caused some traders to begin to lose faith in this scenario.

The 10-year yield, which was on the verge of testing its highest levels since mid-year when trading began in Asia, fell below its 200-day average as the vote count progressed.

“T-bill yields rose as early results showed increasing signals of a blue sweep, but they quickly returned as Florida remains very close,” said Jon Hill, BMO Capital Markets strategist. “It’s going to come and go all night, and maybe all week.”

The election is just the start of a busy week for bond traders. The Treasury’s announcement on Wednesday of its quarterly issuance plans could produce sharper yield swings, and the Federal Reserve releases a policy decision on Thursday. All of this is happening against the backdrop of an increase in global coronavirus cases and new lockdowns, which are blurring the economic outlook. As the 2016 US election showed, market sentiment can change dramatically in a single day.

At the time, the surprisingly optimistic market reaction to Trump’s victory left a lot on Wall Street, as the markets were spinning in no time.

Initially, Treasuries soared on Election Day, while US equity futures plunged and the dollar tumbled as investors rushed to assess a possible surprise victory for Trump over Democrat. Hillary Clinton.

But less than 24 hours later, markets have seen a dramatic turnaround as investors begin to assess the prospects for tax cuts and increased spending. The product produced one of the biggest one-day reversals in stock market history, the greenback rallied against most major competitors and bond yields climbed. And even if investors understand the rhetoric correctly, the markets have the potential to get ahead of themselves, leaving room for a potential reversal in the days and weeks to come.

(Adds upcoming Fed decision, 2016 market moves.)

© 2020 Bloomberg L.P.

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