By Sue Chang and William Watts, MarketWatch

Trump election victory is accelerating a selloff in long-dated Treasury notes

Long-dated U.S. Treasurys fell Wednesday, propelling the 10-year Treasury yield to trade above 2%, a level not seen since January, on expectations Donald Trump will significantly boost fiscal spending as well as uncertainties from an untested president.

"Right now, it's a fear trade," said Kevin Giddis, head of fixed income capital markets at Raymond James. "While it is very early and most are trying to understand the forward thinking, the general perception is that a Donald Trump presidency will take us further into debt and ultimately be inflationary, affecting the values of all debt, including Treasurys."

The yield on the 10-year Treasury note soared 15.3 basis points to 2%--a level it hasn't touched in nine months. The yield on the 30-year bond jumped 20 basis points to 2.815%, according to FactSet. At the short end of the curve, yields bounced back with the two-year up marginally to 0.878%.

Yields at the short end, which had earlier declined on haven-inspired buying and fading expectations that the Federal Reserve will raise interest rates in December, reversed direction. Bond yields and bond prices move in opposite direction.

"The Trump victory means the global deflation crisis may finally be resolved. It might be chaotic how it gets better, but deflation's prognosis is much poorer, with Trump. And that is ultimately good," said Richard Hastings, macro strategist at Seaport Global.

After an initial drop, U.S. stocks rebounded with the S&P 500 index and the Dow Jones Industrial Average both up about 1%.Stocks had been moving higher, suggesting that there was some appetite for risky assets, which can be bearish for government bond prices, lifting yields.

Rob Carnell, chief international economist at ING Bank, said aggressive protectionism espoused by Trump is likely to be the greatest threat to U.S. growth while expansionary fiscal policy could offset some of the adverse impact. However, the Fed is likely to view the market turmoil as a financial market tightening, "and the case for a December rate increase from the Fed has diminished substantially." However, fed-funds futures, a popular way for Wall Street to bet on the odds of a rate increase by the Federal Reserve, held steady, with the market pricing in a 76.3% probability of a December rate increase, according to CME Group data (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html).

Government-bond prices initially rallied across the board, pushing yields lower, asthe potential for a surprise Trump victory over Democratic challenger Hillary Clinton rose. Treasurys typically serve as a haven asset during times of uncertainty.

(https://twitter.com/Chris_Whittall/status/796308861015756800)

The dollar had weakened (http://www.marketwatch.com/story/dollar-mexican-peso-drop-as-trump-secures-us-presidency-2016-11-09) versus major rivals but has since recovered with the U.S. dollar index gaining 0.5%.

Analysts said expectations that Trump will pursue large tax cuts and a significant increase in public spending, particularly on infrastructure, could lead to bigger deficits that in turn would increase the supply of bonds, which would weigh on prices and push up yields.

"Away from the initial reaction to Trump winning...the fact that the Republicans appear set to control both houses in Congress will help get conservative policies through," wrote Kit Juckes, global macro strategist at Société Générale,in a note. "Not good for international trade, but potentially pointing toward lower tax rates and possibly, an easier overall fiscal stance if it's hard to get spending cuts through as an offset. More than an FX issue, that throws out questions about the bull steepening in Treasurys."

(END) Dow Jones Newswires

November 09, 2016 13:10 ET (18:10 GMT)

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