U.S. Bond Yields Climb on Post-Election Outlook

By Julia-Ambra Verlaine

Expectations for a postelection surge in government spending powered the yield on the benchmark 10-year Treasury note to its biggest monthly gain in two years on Friday.

The 10-year yield, a benchmark for borrowing costs on everything from mortgages to student loans, settled at 0.858%, notching its biggest monthly climb since Sept. 2018, according to Tradeweb. Some investors said expectations that postelection economic stimulus will spur growth and inflation, along with greater government borrowing, have spurred the move.

Many are now betting on Democratic control of the White House and Congress, which could result in greater spending to help businesses and local governments weather the pandemic. The U.S. Treasury plans to issue trillions of dollars of securities in coming years to fund everything from tax cuts to economic relief efforts, and analysts said it would likely continue raising the sizes of its bond auctions next month during its quarterly refunding announcement.

Those wagers have outweighed investors' tendency to shelter in the relative safety of government debt during stocks' recent fall. The S&P 500 posted its worst week since March on Friday, even as the 10-year yield, which rises when bond prices fall, notched a second consecutive weekly gain. It was just the 17th time since 1962 that the 10-year yield increased for the week while the S&P 500 declined, according to Bespoke Investment Group.

"Investors will demand higher rates to absorb the supply of debt if the U.S. goes on a massive fiscal expansionary program," said Michael de Pass, global head of U.S. Treasury trading at Citadel Securities.

Many now anticipate Democratic control of the White House and Congress, which could result in greater spending to help businesses and local governments weather the pandemic. The U.S. Treasury has issued substantial amounts of bonds in recent years to fund everything from tax cuts to pandemic relief efforts. Many expect the Treasury will continue to raise auction sizes next month during its quarterly refunding announcement.

Expectations that the Federal Reserve will hold interest rates low for years to help boost the economy, along with the central bank's bond purchases, have helped keep Treasurys trading in a narrow range for months. A Democratic sweep could upend that range and send the 10-year yield back above 1%, many said.

"The general consensus is that a Democratic sweep will be negative for Treasurys given the likelihood of considerable, debt-financed stimulus," said Russ Koesterich, a portfolio manager at the BlackRock Global Allocation Fund.

Data on Friday pointed to growing strength in household spending on goods and services, with the Commerce Department saying personal-consumption expenditures posted a fifth straight monthly gain.

Another reason analysts said bond prices have fallen alongside stocks: Hedge funds are looking to rotate into cash, cutting positions ahead of the U.S. election to avoid price swings. U.S. stocks fell Friday with the Dow Jones Industrial Average on track to close out its worst month since March. With less than a week to go until the U.S. elections, increasing coronavirus infections across the globe and looming shutdowns that could damp the economy, some investors said they are pressing the pause button.

"Clarity is just around the corner, but for now investors don't want to do anything heroic," said Adam Crisafulli, founder of market intelligence firm Vital Knowledge.

Write to Julia-Ambra Verlaine at [e-mail]

(END) Dow Jones Newswires

10-30-20 1721ET