Treasuries slip on US election day as volatility hits one-year high: Report

US Treasury yields rose sharply on Election Day, driven by strong economic data and heightened uncertainty surrounding the outcome of the presidential race as detailed in a report by Bloomberg.

A strong report on the US services sector, showing the fastest growth in over two years, added to market volatility ahead of Thursday’s Federal Reserve policy meeting. The upbeat economic numbers dampened expectations for future rate cuts, with strategists now predicting a more prolonged period of higher rates, the Bloomberg report explained further.

The two-year Treasury yield reached a multi-month high of 4.24 per cent, while the 10-year yield rose by as much as eight basis points to 4.36 per cent, nearing a three-month high.

Further, this uptick in yields came despite a strong auction of $42 billion in 10-year Treasury notes, which drew solid demand at a yield of 4.347 per cent, slightly below market levels. However, the overall bond market remained jittery, with most yields remaining higher on the day as investor concerns about Fed policy and election outcomes mounted.

Bond market volatility spiked to levels not seen in over a year, as traders braced for turbulence regardless of the election result. The ICE BofA MOVE Index, which tracks expected Treasury yield fluctuations, closed at its highest level since October 2023. As the election results approach, options on Treasury futures implied the potential for a 22-basis point swing in 10-year yields by week’s end, the largest such move since 2012.

Bond markets are primed for significant price adjustments

John Higgins, Chief Market Economist at Capital Economics, highlighted the potential for significant price adjustments in the bond market following the election. "While we expect some re-pricing in bonds once the election outcome is clear, it’s uncertain whether the market will see the extreme moves that investors are currently anticipating," he noted.

With the presidential race deadlocked between former President Donald Trump and Vice President Kamala Harris, markets are particularly sensitive to potential shifts in policy. A Republican win could mean a return to pro-growth policies, fuelling inflationary pressure and increasing the deficit, which could push Treasury yields even higher. Conversely, a victory for Harris, representing the Democrats, could dampen yields, as investors price in more cautious fiscal policy.

Tom di Galoma, head of fixed income at Curvature Securities, anticipates the 10-year yield could rise to 4.75 per cent or even 5 per cent post-election, given the expected push for economic expansion. The strong October services data, showing a surge in hiring, only added to speculation that the Fed may need to maintain higher rates for longer. Swaps traders are pricing in a high likelihood, over 90 per cent of a 25 basis point rate cut at the Fed’s meeting this week.

In the currency markets, the US dollar fell slightly, while currency volatility surged. The cost of hedging the euro against the dollar reached its highest level in over four years, as traders adjusted to the heightened risk in global markets. With recent polls showing a narrow race between Trump and Harris, investors are pricing in significant uncertainty in both Treasury and currency markets, preparing for further swings regardless of the election outcome.

Overall, the combination of economic strength, an unpredictable election outcome, and Fed rate expectations has resulted in the highest levels of bond volatility in over a year, setting the stage for a potentially volatile week in financial markets.