By Sue Chang and William Watts, MarketWatch

Yield curve steepens as rate increase expectations fall

Long-dated U.S. Treasurys sank Wednesday after a morning of topsy-turvy trade, pushing up yields on expectations Donald Trump will significantly boost fiscal spending.

Yields at the short end continued to fall on haven-inspired buying and fading expectations that the Federal Reserve will raise interest rates in December.

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."

The yield on the 10-year Treasury note was up 8.6 basis points to 1.941%, while the yield on the 30-year bond soared 14.9 basis points to 2.763%, according to FactSet. At the short end of the curve, yields fell, with the two-year down 2.7 basis points to 0.838%. Yields and bond prices move in opposite direction.

Government-bond prices initially rallied across the board, pushing yields lower, as the potential for a surprise Trump victory over Democratic challenger Hillary Clinton rose. Treasurys typically serve as a haven asset during times of uncertainty. Global equities and U.S. stock-index futures fell sharply. Index futures continue to point to a sharply lower start (http://www.marketwatch.com/story/dow-futures-plunge-500-points-but-pare-losses-as-trump-closes-in-on-us-presidency-2016-11-09) for Wall Street, but are off lows set in late Tuesday and early morning trade.

(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 most recently was trading flat.

A soft dollar could result in broad losses for bond funds as the yield curve adjusts higher, according to Richard Hastings, macro strategist at Seaport Global. The yield curve is a plot of yields between shorter and longer-dated Treasurys.

"This is potentially a chaotic situation," said Hastings. "The relationship of bond prices to stock market price-earnings multiples could trigger revisions in prices across equities and credit markets," he said in emailed comments.

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 inturn 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 towards 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 08:58 ET (13:58 GMT)

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