US yields hit three-month high on election hedging

NEW YORK, Oct 22 (Reuters) – U.S. Treasury yields hit a three-month high on Tuesday as hedging and expectations of a less accommodative Federal Reserve ahead of the Nov. 5 U.S. elections dampened demand for U.S. government debt.

Bonds have been hit as momentum grows toward a more likely Donald Trump presidency, amid fears Trump’s policies, including tariffs and restrictions on undocumented immigration, will increase inflation.

The sharp selloff in bonds on Monday was “partially driven by the market pricing in higher chances of a Trump victory,” said Gennady Goldberg, head of U.S. rates strategy at TD Securities in New York.

Betting site Polymarket showed on Tuesday that Trump has a 66% chance of winning the presidency, while Kamala Harris has a 34% chance of winning.

“Tariffs and actions on immigration will be inflationary shocks,” Goldberg said, adding, “It’s very likely you’ll see the inflationary effects first because it feeds the data in so quickly.”

The US budget deficit is also expected to worsen under a Trump or Harris presidency, which could lead to an increase in Treasury supply next year.

Benchmark 10-year note yields rose 2.2 basis points to 4.204% after reaching 4.222% earlier, 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 rose slightly to 16.7 basis points.

“The market is now largely taking a Trump trade and that’s why I think there’s a danger that we’ll continue to see an emphasis on higher yields,” said Tom Fitzpatrick, head of global market insights at RJ O’Brien.

A strong jobs report for October next week could also push yields higher and possibly prompt traders to reconsider whether the Fed will cut rates next month.

“I don’t think it’s inconceivable that the Fed actually reconsiders moving into November, it’s certainly possible that the market thinks so,” Fitzpatrick said. “The reduction in yields here seems like a real threat.”

The stronger-than-expected employment report for September has led investors to speculate on the possibility that the US central bank will cut interest rates more than usual. The Fed cut rates by 50 basis points last month.

Traders are now pricing in a rate cut of 42 basis points by the end of the year, suggesting a less than 100% chance that the Fed will cut by 25 basis points at each of its upcoming 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)