By Carolyn Cui

U.S. Treasury prices fell on Election Day, as early voting results showed that Hillary Clinton held a lead in some battleground states.

As of late Tuesday afternoon Eastern Time, the Democratic nominee held leads in seven key states including Florida and Ohio that Republican candidate Donald Trump must win to keep his path to the presidency alive, according to live estimated results from election data service VoteCastr.

"The fact that some of these polls are coming in showing somewhat of a lead here for Hillary Clinton has got the bond market a little bit spooked," said Thomas di Galoma, a managing director at Seaport Global Securities LLC.Bond prices tanked on the presumption that Mrs. Clinton would win, which is considered a less risky outcome and should reduce the demand for safe-haven assets. At 3 p.m. ET, the yield on the benchmark 10-year U.S. Treasury notes settled at 1.867%, a five-month high, up from 1.826% a day earlier. Bond yields rise when prices fall. Stocks gained, reversing earlier losses, with the S&P 500 index up 0.4% for the day.

Traders are closely watching the polls and early voting results on Election Day, the culmination of a tight presidential race between Mrs. Clinton and Mr. Trump. The stark differences between the two campaigns on issues, including fiscal policy and tax plan, have a huge bearing on U.S. economy, as well as the future path of interest rates.

On Wall Street, a Clinton victory is the baseline scenario for most analysts. Recent economic reports also suggested a continuation of slow but steady economic expansion, supporting the FederalReserve's case for normalizing monetary policy. In a Tuesday report, the National Federation of Independent Business said that the small business optimism index edged up to 94.9 in October from 94.1 in September.

A Clinton win, analysts say, will clear a hurdle for the Fed to raise rates. In the Fed-fund futures market, the odds for a December Fed rate increase climbed to 81.1%, up from 71.5% a day earlier, according to data from CME Group.

But some analysts refused to read too much into the early polls as millions of Americans are still casting their ballots. Some toss-up states, such as Nevada and Colorado, also have late closing times.

"It's a little goofy to be so obsessed with this information," referring to the real-time read of the results, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, who said he expected the final results not to come in until late in the evening.

Others are trying to look beyond the election. Given how contentious this year's campaigns were, the two parties are likely to engage in more fights over budget resolution and debt ceiling, causing a worse gridlock in Washington in the early days of the new administration.

"It'll be a continuation of what we're accustomed to," said George Goncalves, head of U.S. interest-rates strategy at Nomura Securities International in New York. In that case, bond yields are unlikely to rise much higher, he added.

The 10-year Treasury yield started the year at around 2.3%, when investors were expecting as many as four rate increases over the course of 2016. But the U.S. yield tumbled amid concerns about a weakening global economic outlook that have pushed benchmark rates in many countries below zero.

The benchmark 10-year yield dropped to a record low at 1.365% in early July after the U.K's vote to leave the European Union. Bond yields have since been creeping up as central banks began to question the benefits of further monetary easing. On the eve of U.S. election, yields rallied again after the Federal Bureau of Investigation cleared Mrs. Clinton in its email probe.

In contrast, the front-end of the Treasury curve has been moving on its own. The yield on three-month Treasury bills continued to soar in Tuesday's trading, hitting a fresh eight-year high of 0.426%, a reflection of the market's firm belief of a rate increase at the Fed's December meeting.

The yield is an accumulation of expected overnight rates over the next three months. "You're getting a higher and higher weight on the higher post-Fed meeting rates, as time goes on," said Thomas Simons, a money-market economist in the fixed-income group at Jefferies LLC. The Treasury's recent outsized issuance of short-term papers also contributed to the weakness in the front-end of the curve.

COUPON ISSUE PRICE CHANGE YIELDCHANGE

3/4% 2-year 99 25/32 dn 3/32 0.862% +4.0BP

1% 3-year 99 29/32 dn 5/32 1.030% +5.2BP

1 1/4% 5-year 99 19/32 dn 7/32 1.336% +4.7BP

1 5/8% 7-year 99 27/32 dn 10/32 1.651% +4.7BP

1 1/2% 10-year 96 24/32 dn 12/32 1.867% +4.1BP

2 1/4% 30-year 92 6/32 dn 18/32 2.630% +2.9BP

2-10-Yr Yield Spread: +100.5BPS vs +100.4BPS

Write to Carolyn Cui at carolyn.cui@wsj.com

(END) Dow Jones Newswires

November 08, 2016 16:49 ET (21:49 GMT)

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