Treasury rates move higher before election results
U.S. Treasury yields rose in early European trading Tuesday as voters went to the polls in the midterm elections and investors considered how the results could affect federal spending and borrowing. Oil prices also recovered modestly after a sharp decline on Monday.
The two-year Treasury yield increased 1 basis point to 4.593%, while the 10-year yield rose 2.1 basis points to 4.914%, according to Tradeweb. A basis point is one-hundredth of a percentage point. Treasury yields influence the rates investors demand to lend money to the federal government and help set borrowing conditions across the economy.
| Security | Move | Yield |
|---|---|---|
| Two-year Treasury | Up 1 basis point | 4.593% |
| 10-year Treasury | Up 2.1 basis points | 4.914% |
Investors were waiting for the first election results after polls close Tuesday. Analysts were watching whether Democrats could win control of both the House and Senate. The election outcome could affect expectations for tax, spending and deficit policy, although market analysts said the immediate effect may be limited.
“Their impact on the markets will depend largely on potential shifts in fiscal policy--a sphere where the scope for action appears limited, given the already strained debt dynamics and high financing costs,” Laura Cooper, head of macro credit and global investment strategy at Nuveen, said in a note.
Cooper said a divided government could provide some reassurance to bond investors by limiting the possibility of additional fiscal expansion. It would not, however, resolve the underlying federal deficit. She also said political gridlock could leave the extra compensation investors demand to hold longer-term bonds elevated, limiting the potential for yields to decline.
Federal Reserve policy remains key for shorter maturities
The two-year portion of the Treasury market is more closely tied to expectations for Federal Reserve monetary policy and inflation, according to Cooper. Longer-term yields also reflect government borrowing needs, economic growth expectations and the term premium, which is the additional return investors seek for holding bonds over a longer period.
Bond investors were also preparing for the release of JOLTS job-openings data. The report provides information about labor demand and is one of the economic indicators that markets use when assessing inflation pressure and the outlook for interest rates.
“The upcoming U.S. midterms may bring political change, but the secular drivers of returns play out over multiple election cycles,” Seth Meyer, global head of client portfolio management at Janus Henderson Investors, said.
For households, changes in Treasury yields can flow through to financial conditions, though not on a one-for-one basis. Government bond yields are reference points for some consumer and business borrowing rates, while Treasury securities also influence returns available in savings and fixed-income markets. The figures reported Tuesday were market levels during early trading, not rates guaranteed to any individual borrower or saver.
What markets were watching
- Election results: Investors were assessing the potential effect of control of Congress on fiscal policy.
- Federal borrowing: High financing costs and the federal deficit remained central concerns in the bond market.
- Economic data: JOLTS job openings data was due for release as investors evaluated labor-market conditions.
