US Treasuries yields fall ahead of CPI and election result

By Stefano Rebaudo

November 8 (Reuters) – US Treasury yields edged lower in trading in London on Tuesday as investors await the outcome of the midterm elections that will determine control of Congress.

Markets will also be closely watching October consumer price data, due Thursday, for clues on the Federal Reserve‘s future monetary policy stance.

Last week, a strong US jobs report for October bolstered views that the central bank would be in no rush to slow its aggressive tightening, which would trigger a sell-off in bonds.

Republicans have been gaining momentum in polls, and analysts are predicting a divided government with Republicans gaining control of the House and possibly the Senate.

However, after the election, markets may have to hold back their judgment for a few days until the full results are known.

“Precedent suggests that the final results will take time (and court cases) to be announced,” said Paul Donovan, chief economist at UBS Global Wealth Management.

Investors expect a Republican majority will limit President Joe Biden’s ability to pursue expansionary fiscal plans.

A Republican majority, even in just one House of Parliament, “suggests that once inflation is under control, the responsibility for stimulating the economy will rest with the Federal Reserve,” ING analysts said.

“This is our base case for aggressive rate cuts from the second half of 2023,” they added.

The 10-year Treasury note yield fell 1.5 basis points (bps) to 4.20%.

“A split government outcome with political deadlock over the next two years should come as no surprise, so the impact on markets should be modest,” said Philip Marey, US strategist at Rabobank.

However, an unexpected victory for Democrats in the House of Representatives would leave the door open to ambitious left-wing policies that could further fuel inflation and have a positive impact on interest rates, Marey said.

30-year US Treasury yields were flat at 4.31%.

A closely watched portion of the US Treasury yield curve, which measures the gap between 2-year and 10-year Treasury note yields, remained inverted at -50.8 basis points.

An inversion of this part of the curve typically indicates a US recession. (Reporting by Stefano Rebudo; Editing by Ed Osmond)

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