US yields hit three-month high on election hedging

(Updated at 1500 EDT)
By Karen Brettell
NEW YORK, Oct 22 (Reuters) – U.S. Treasury yields hit a three-month high on Tuesday as hedging before the November 5 U.S. elections and expectations for a less dovish Federal Reserve dampened demand for the U.S. government debt.
Shifting momentum towards a more likely Donald Trump presidency has weighed on bonds, with Trump policies including tariffs and restrictions on undocumented immigration expected to increase inflation.
A sharp sell-off in bonds on Monday “was partly driven by the prediction markets’ pricing in higher odds of a Trump victory,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
Betting site Polymarket on Tuesday shows Trump as having 66% odds of winning the presidency, compared to 34% for Kamala Harris.
“Tariffs and crackdowns on immigration would be stagflationary shocks,” Goldberg said, adding that its “very likely you’ll see the inflationary impact first because it feeds through the data much faster.”
The U.S. budget deficit is also expected to worsen under a presidency by either Trump or Harris, which could lead to increases in Treasury supply next year.
Benchmark 10-year note yields were last up 2.2 basis points at 4.204% and earlier reached 4.222%, the highest since July 26.
Two-year note yields rose 1 basis point to 4.035%.
The yield curve between two-year and 10-year notes steepened slightly to 16.7 basis points.
“The market is trading to a large extent now the Trump trade and that’s why I think there’s a danger we’re going to continue to push to higher yields,” said Tom Fitzpatrick, head of global market insights at R.J. O’Brien.
A strong jobs report for October next week could also add to yield increases and possibly lead traders to rethink whether the Fed will cut rates next month.
“I don’t think it’s inconceivable that the Fed actually reconsiders moving in November, it’s definitely possible the market thinks it,” said Fitzpatrick. “A squeeze up in yields seems like a real danger here.”
A much stronger than expected employment report for September has led investors to price out the probability that the U.S. central bank will make larger than normal interest rate cuts. The Fed cut rates by 50 basis points last month.
Traders are now pricing in 42 basis points of cuts by year-end, indicating a less than 100% chance that the Fed will make 25 basis point cuts at each of its coming two meetings.
The Treasury Department will sell $13 billion in 20-year bonds on Wednesday and $24 billion in five-year Treasury Inflation-Protected Securities on Thursday.
(Reporting By Karen Brettell, Editing by Nick Zieminski)