(Bloomberg) -- Treasuries surged in volatile trading as early U.S. election results suggested the presidential race may be close nationally, dashing expectations for a quick and decisive decision.
The 10-year yield, which touched an almost five-month high of 0.94% in early Asia trading, tumbled to 0.83%. Meanwhile, the 30-year rate was down to 1.63% after climbing to 1.75%, which briefly pushed its gap over the 5-year maturity to the widest since 2016. The dollar gained.
The Treasuries rally accelerated as state-by-state results rolled in, suggesting diminished expectations for a broad Democratic victory that would pave the way for significant, debt-financed fiscal stimulus. The market was vulnerable to reversal -- leveraged investors as of last week had built up a record short bet on bond futures. Now those positions, seemingly premised on a blue-wave scenario, are at risk of getting squeezed.
“It’s looking like ultimate clarity on a result will take time -- that means uncertainty, and thus risk-averse strategies,” said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong.
As the first polls closed in the U.S. Tuesday night, investors had been bracing for Democrat Joe Biden and his party to potentially sweep the U.S. elections, a so-called blue wave. Rates on 10-year Treasuries, a benchmark for global borrowing, have been climbing since August on expectations of a Democratic sweep.
Big Reversal
But signs of a tight race in states such as Florida, where President Donald Trump held a narrow lead, had some traders starting to lose confidence in that scenario.
The 10-year yield, which was on the brink of testing its highest levels since mid-year in early Asia trading, sank back below its 200-day average as the vote-counting progressed.
“Treasury yields increased as early results showed growing signals of a blue sweep, but quickly retraced as Florida remains very close,” said BMO Capital Markets strategist Jon Hill. “It’s going to be back and forth all night, and perhaps all week.”
The election is just the start of a jam-packed week for bond traders. The Treasury’s announcement Wednesday of its quarterly issuance plans could produce more sharp yield swings, and the Federal Reserve releases a policy decision Thursday. It’s all happening against the backdrop of rising global coronavirus cases and renewed lockdowns, which are muddying the economic outlook. As the 2016 U.S. election showed, market sentiment can shift dramatically in a single day.
Back then, markets’ unexpectedly upbeat reaction to Trump’s victory left many on Wall Street red-faced as markets turned on a dime.
Initially, Treasuries soared on Election Day, while U.S. stock futures plunged and the dollar tumbled as investors rushed to price in a potential surprise win by Trump over Democrat Hillary Clinton.
But less than 24 hours later, markets had a dramatic turnaround, with investors starting to price in the prospects of tax cuts and increased spending. The Dow Jones Industrial Average produced one of the biggest single-day reversals in stock market history, the greenback rallied against most major peers, and bond yields climbed. And even if investors do get the narrative right, there is the potential for markets to get ahead of themselves, making room for a potential reversal in the days and weeks to come.
(Adds Fed decision ahead, 2016 market moves.)
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