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Treasury Yields Fall on Reduced Stimulus Expectations

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Municipal workers opening and sorting ballots in Wilkes-Barre, Pa., on Wednesday.

Municipal workers opening and sorting ballots in Wilkes-Barre, Pa., on Wednesday.

Photo: Mary Altaffer/Associated Press

U.S. government-bond yields fell sharply Wednesday, reflecting traders’ bets that the results from Tuesday’s election will lead to smaller economic stimulus efforts than many had expected.

Though votes are still being counted and a few key Senate races have yet to be called, returns so far suggest a very good chance that Republicans will maintain control of the Senate even if Joe Biden defeats President Trump to take the White House, investors and analysts said. Investors said they think that outcome is more hostile to plans for large spending on pandemic relief and infrastructure projects than a Democratic takeover of the upper chamber.

Investors and economists pay close attention to longer-term Treasury yields because they help set borrowing costs across the economy. Earlier this year, yields fell to record lows as the coronavirus pandemic caused major economic disruptions and the Federal Reserve slashed interest rates in an attempt to limit the damage.

In recent months, ultralow yields have helped fuel demand for riskier assets such as stocks and led to a surge in borrowing by companies, while homeowners have rushed to refinance their mortgages.

The yield on the benchmark 10-year U.S. Treasury note traded at a recent 0.788%, according to Tradeweb, down from 0.881% at the end of normal U.S. trading hours Tuesday.

While many debated what different election results would mean for other assets like stocks, investors said the consequences for government bonds were always more straightforward.

The yield touched 0.942% just as the first election results started being reported later in the evening, a high-water mark for bets on a Democratic-led economic relief package. Fiscal stimulus tends to boost yields in part by increasing the supply of bonds. It can also boost economic growth and inflation, which can put pressure on the Fed to raise short-term interest rates.

Investors preparing for a Democratic sweep had anticipated not only trillions of dollars in additional coronavirus aid but also more spending on renewable energy and infrastructure projects—enough, potentially, to at least increase the threat of higher interest rates and drive the 10-year yield to 1% or higher. The prospects for that result appeared dim on Wednesday.

“It seems like Joe Biden still has a potential path to the presidency but Democrats do not any longer have a path to win the Senate,” said Michael Lorizio, a senior trader at Manulife Investment Management.

That, he said should “result in a smaller fiscal package” and ensure that the Fed keeps interest rates near zero for even longer than previously expected.

Despite their declines, Treasury yields remain above their lows from the summer, when the 10-year yield fell below 0.6%. Analysts said that reflected expectations that Congress will still pass some kind of coronavirus aid as well as a recent run of decent economic data.

Some, though, said yields could fall further if coronavirus cases continue to surge in Europe and the U.S.—leading to more restrictions on business and social activity—and if diminished government assistance drags on U.S. economic data.

For yields to drop to the bottom of their recent range, “you would need more negative economic news, and we may be in store for that,” said Michael Collins, a senior portfolio manager at PGIM Fixed Income.

President Trump and former Vice President Joe Biden addressed supporters early Wednesday morning as votes were still being tallied. Biden said he was optimistic, while President Trump raised the possibility of election fraud without citing any evidence. Photos: Carlos Barria/Reuters; Stefani Reynolds/Bloomberg News

Meanwhile, corporate bonds also rallied Wednesday morning, partly because a degree of election uncertainty had been removed.

“I think there’s some relief that at least we have the date November 3 behind us,” said Anders Persson, chief investment officer for fixed-income at Nuveen LLC, which manages $486 billion of taxable fixed-income assets. “Not that many clients were willing to put money to work ahead of the elections and now some of that anxiety is filtering through.”

Investment-grade corporate bond prices of companies such as
General Electric Co.
,
Bank of America Corp.
and
AT&T Inc.
rose between 2% and 4% in early trade, according to data from MarketAxess.
Boeing Co.
’s recently issued debt, which had fallen throughout the past week, rose over 1% to trade around 101 cents on the dollar.

Still, sentiment could shift if a contested presidential election drags out, Mr. Persson said. “It’s likely to be touch and go and I wouldn’t expect market participants to have very strong conviction.”

Write to Sam Goldfarb at sam.goldfarb@wsj.com and Matt Wirz at matthieu.wirz@wsj.com

A Global Asset Management Seoul Korea Magazine

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