Treasury yields tumble as investors react to uncertain US election outcome

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Investors are buying back into safe-haven US government bonds, after expectations of a ‘blue wave’ Democratic victory in the ongoing vote-count for the US presidential election were dashed, causing yields to slide by 0.12 per cent in one day.

The ballots counted so far narrowly favour Democrat candidate Joe Biden to win the presidency, but many now expect that his plans for a large stimulus package and USD2 trillion green infrastructure spending will be curtailed by a Republican-controlled Senate. 

President Donald Trump and his opponent Biden are still waiting for key battleground states to finish counting, although a final outcome to the election might not be known for several days or weeks as a result of threatened legal moves by Trump.

The 10-year US Treasury bond currently yields 0.78 per cent, having fallen from 0.9 per cent on the previous day, and 1.86 per cent last year. 

Eric Vanraes, portfolio manager for the Strategic Bond Opportunities Fund at Eric Sturdza Investments, says that on Wednesday, he took profit on the portfolio’s “whole position” in 30-year Treasuries and also reduced exposure to the 10-year. 

This had the effect of decreasing the portfolio’s duration. “A higher duration was a strategy to hedge the credit risk, ie a potential spread widening of our high beta corporates. This strategy is less appropriate in the current environment.”

Vanraes adds: “Should Treasury yields increase again, we would buy back some 10y and 30y because whatever the outcome of the elections, Covid is still present and we can’t exclude a second wave in the US after Europe.”

As for the election, Vanraes says that the picture is “still unclear” but “we are now sure that there will be no blue wave at the Senate”. 

“It means that the “leftist” part of Biden’s programme will not be implemented. This is why both equities and bonds rally.”

According to Erik Knutzen, chief investment officer for Neuberger Berman’s multi asset strategy, says the “closeness of the vote increases the probability of a continuation of mixed government, with the presidency and at least one house of congress in the hands of opposing parties”. 

He says that the “initial market response appears to support this”, with technology stocks rallying against cyclical stocks and the US dollar also regaining some strength. 

“Treasury yields are likely to remain stable, or even move lower, as stimulus expectations are tempered and in response to any risk-off sentiment.”

“Bouts of volatility are likely to persist until there is a resolution of the election results,” says Knutzen, but he adds that over the coming months, the US election outcome will cease being a main driver of financial markets.

“On a 12-month view, market valuations are less likely to be determined by the election result than by news on coronavirus infections, treatments and vaccines, and the overall backdrop of rising GDP and earnings growth, declining unemployment and accommodative fiscal and monetary policy we think will prevail next year,” he concludes.

Stefan Kreuzkamp, chief investment officer at German-headquartered asset manager DWS, pours cold water on initial market speculation over the US election outcome.

“It is still far too early for a final assessment, and we would not put too much emphasis on early market reactions. Investors will probably not get a clear picture of the new administration’s priorities, what it wants to do and is able to do, until the first half of 2021.”

Kreuzkamp adds that a “continuation of the status quo has become much more likely”, pushing back investor hopes for a timely and comprehensive stimulus package in the US.

He adds that key drivers of the capital markets are largely independent of the election results, such as the coronavirus pandemic in the short term and central bank policy in the medium term, which is likely to stay loose for some time.

“In short, we are further away from a change of political course than expected. But that also means that we do not need to fear any dramatic changes.”

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