Treasuries rallied ahead of quarterly issuance as traders reacted to early midterm election vote counts favoring Democrats. Yields fell across the curve, with five-year notes dropping seven basis points to 4.69% and benchmark 10-year yields down six basis points to 4.90%. A Democratic takeover of the House would create a divided government, reducing the likelihood of deficit-expanding legislation under the Trump administration. Bond investors have been uneasy about the US fiscal trajectory with the nation's debt load at around $40 trillion, and gridlock may limit the risk of additional spending or tax cuts requiring more Treasury issuance.
Early headlines and prediction markets suggest a rising probability of a blue wave, generally regarded as negative for the dollar and positive for US Treasuries. Kalshi is pricing roughly a 97% probability of Democrats taking the House and about an 86% chance of winning the Senate, pointing to the possibility of a sweep of both chambers. For Nathan Thooft, a senior portfolio manager at Manulife Investment Management, more gridlock likely means less fiscal impulse, potentially lower yields, and one less tailwind for the dollar.
The price action reverses some of Tuesday's losses, when Treasury yields climbed after a better-than-expected report on US job openings bolstered the case for more Federal Reserve interest-rate hikes. Traders are also awaiting payrolls data due Friday. A divided government just speaks to less fiscal spending than we have seen in the last few years, said Brij Khurana, portfolio manager at Wellington Management. Typically when we get a divided government, it has been historically pretty good for Treasuries. Traders are also focused on Wednesday's quarterly refunding announcement, with Wall Street girding for the biggest revamp in guidance for US Treasuries issuance since early 2024.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing