By Min Zeng
A broad wave of selling swept the U.S. government bond market on Monday as investors see a brighter likelihood of Hillary Clinton prevailing in Tuesday's presidential election.
The selling sent the yield on the benchmark 10-year Treasury note to near a five-month high. The yield on the three-month Treasury debt, or bills, reached the highest level since 2008. Yields in German bunds and U.K. gilts also rose. Yields rise as bond prices fall.
The broad retreat of haven assets comes as U.S. stocks posted a strong gain after logging the longest losing streak since 1980. The key catalyst driving investors to step outof the bunker of relatively safer assets was news Sunday by the Federal Bureau of Investigation that a review of new evidence had produced no reason to warrant charges against Mrs. Clinton, the nominee from the Democratic Party.
Mrs. Clinton is seen by many investors as a known quantity whose presidency would be unlikely to generate policy shocks. In contrast, investors are concerned that a victory by Republican nominee Donald Trump would usher in a period of uncertainty given his lack of political experience and his views on trade protectionism.
"The read is that Clinton is the candidate that brings more certainty to the markets," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
Analysts say investors may need to gird for price swings until the dust settles. Bond traders say they refrain from placing lopsided bets as the market swoon following the Brexit vote in late June remains a fresh memory.
Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings, advises his clients to staying "close to shore, " meaning that they should keep their bondholdings close to the bond indexes they track.
The yield on the benchmark 10-year Treasury note settled at 1.826%, compared with 1.783% Friday.
The yield dropped by 0.06 percentage point last week as anxiety over a possible Trump win drove investors into the bunker of relatively safer assets.
The yield on the three-month bill rose to 0.408%, up from a recent low of 0.18% in late September.
Another big factor hurting demand for bills on Monday: the Treasury announcement to sell $65 billion of bills maturing in four weeks. That is a record amount for the maturity since the Treasury started selling four-week bills in 2001. The Treasury has been ramping up bill issuance over the past weeks and the supply pressure has sent bill yields higher. The growing prospect of an interest-rate increase next month by the Federal Reserve also added to selling pressure in bills, say traders.
Analysts say a Clinton win will clear another hurdle for the Fed to raise rates.
Monday, fed-fund futures, a popular derivative market for hedge funds and money managers to bet on the U.S. interest rate policy, showed 72% odds that the Fed would raise rates by its December meeting, according to data from CME Group. The odds had pulled back to 67% at the end of last week as anxiety over a Trump victory increased.
Analysts say a win by Mr. Trump would likely send bond yields lower in the short term. In the longer term, they argue, bond yields may rise given his leaning toward fiscal stimulus, which would require more issuance of government bonds for funding, and pose a threat to the value of long-term Treasury debt.
The prospect of a policy shift toward fiscal stimulus has been one of the main drivers sending bond yields higher after a big decline during the summer. Other reasons sapping demand for long-term bonds are global data pointing to improvement in the manufacturing industry, higher inflation pressure and an uptick in inflation expectation, as well as concerns that major central banks' monetary stimulus are reaching their limits in inflating the valuations of government bonds in the developed world.
The yield premium investors demand to hold long-term debt relative to their short-term peers has been rising, too. On Monday, the 10-year Treasury note's yield premium relative to the two-year note rose to 1 percentage point, the highest since May.
A higher premium is known in the bond world as a steepening yield curve. Investors typically interpret it as a sign of a brighter growth outlook. A steepening curve boosts the attractiveness of bank shares. Banks typically lend out cash longer term, so higher long-term bond yields benefit their earnings prospect.
Others believe that Mr. Trump's idea of trade protectionism may undermine the U.S. growth prospect, and this is part of the reason investors sought safety in Treasury bonds. In the case where the U.S. growth outlook darkens, they say, the Fed may need to reverse its tightening campaign and provide monetary stimulus again, which would send bond yields lower still.
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
November 07, 2016 16:02 ET (21:02 GMT)
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