By Min Zeng
The U.S. government bond market pulled back Monday after last week's price rally as investors see a brighter likelihood of Hillary Clinton prevailing in Tuesday's presidential election.
Demand for haven assets retreated after the announcement 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.
In recent trading, the yield on the benchmark 10-year Treasury note was 1.817%, according to Tradeweb, compared with 1.783% Friday. Yields rise as bond prices fall.
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 S&P 500 stock index was down for a ninth consecutive session Friday and logged the longest losing streak since 1980.
Bond traders say investors need to gird for price swings as financial markets are likely to be sensitive to any headlines and poll results leading into election night.
Some bond traders say they are refraining from placing lopsided bets and will wait for fresh trading opportunities after the dust settles.
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.
Mr. Milstein at R.W. Pressprich agreed.
"This is an election where anything can happen," he said. "I am still not ruling out a Trump victory so I think the best strategy is to be flat."
Some 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.
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 Federal Reserve may need to reverse its tightening campaign and provide monetary stimulus again, which would send bond yields lower still.
U.S. economic data releases lately have bolstered the Fed's case to raise interest rates in December. Friday's jobs report showed wage inflation posted the fastest gain since 2009, supporting moderate tightening in monetary policy.
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 76% 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.A victory by Mrs. Clinton could send bond yields higher in the longer term as she has also been advocating fiscal stimulus to boost growth. Yet analysts caution that she may face political gridlock if the Republicans remain the majority in Congress.
"If the Republicans take the Senate and the Democrats the Oval Office, the likelihood of swift and decisive fiscal stimulus clearly declines," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. "Let us not forget that the debt ceiling will come into focus at the beginning of the New Year" with the current deadline being March 2017.
The 10-year yield has been rising from its record close low of 1.366% made in early July, but it is still very low from a historical standpoint. The yield traded at 2.273% at the end of 2015. It traded at 3% in early 2014.
Write to Min Zeng at firstname.lastname@example.org
(END) Dow Jones Newswires
November 07, 2016 11:17 ET (16:17 GMT)
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