The prospect of a Democratic sweep in next month’s elections
is helping to push U.S. government-bond yields higher, stirring memories of
four years ago when yields climbed sharply after a Republican victory.
Yields, which rise when bond prices fall, have climbed in
recent days as polls have shown a growing lead for former Vice President Joe
Biden over President Trump, as well as improving chances that Democrats could
end up holding both houses of Congress.
For debt investors, the key isn’t necessarily whether Mr.
Biden or Mr. Trump wins. It is whether one party or another has unified control
of government, making it easier to expand the federal budget deficit through
tax cuts or spending programs.
Bigger deficits can push yields higher for two reasons:
first, by increasing the supply of outstanding bonds as the government ramps up
borrowing and, second, by potentially boosting economic growth and inflation,
which makes bonds less attractive.
The improving poll numbers for Democrats in November
dovetailed last week with renewed discussion in Washington about another round
of coronavirus relief aid before the election. That gave investors a
double-dose of stimulus hopes, though prospects of a pre-election bill appeared
to dim over the weekend.
As of Tuesday, the yield benchmark 10-year U.S. Treasury
note stood at 0.726%, up from 0.644% before the presidential debate on Sept 29.
The yield on the 30-year bond has climbed even more to 1.513% from 1.404%. But
some investors see room for a bigger rise, which could have repercussions on
other assets like stocks and gold that have benefited from ultralow yields.
For investors, “this election is about the implication for
fiscal policy,” said Thanos Bardas, global co-head of investment grade at
Neuberger Berman. The 10-year yield, he added, could in time “go to 1.3% easily
on a full sweep” by Democrats.
Investors can’t take any scenario for granted. In 2016, few
predicted Mr. Trump’s victory or how the market would respond. This time, polls
suggest that Republicans could hold on to the Senate even if they lose the
White House, a potential recipe for legislative gridlock. Any number of other
events, such as the approval of a coronavirus vaccine or a marked slowdown in
the economic recovery, could also diminish the importance of the election.
Mr. Bardas, for one, said his team wasn’t making any big
bets on the path of Treasury yields, in part because investors could pile into
bonds if the outcome of the election is contested or uncertain.
A sustained move higher in Treasury yields could be
difficult to achieve. Not only is the economy suffering due to the pandemic, but
its average growth rate outside of recessions has declined in recent decades.
At the same time, inflation has remained stuck below the Federal Reserve’s 2%
annual target. As a result, investors widely expect the central bank to hold
short-term interest rates near zero for years and to keep buying Treasurys—both
policies that should constrain longer-term yields.
When Republicans captured the Congress and the White House
in 2016, the 10-year yield stood at around 1.9%. It quickly rose to 2.6%,
lifted by expectations that the Republican-controlled Congress would try to
lift economic growth by slashing regulations, cutting taxes and boosting
infrastructure spending.
Ultimately, Mr. Trump did sign a tax cut estimated to cost
nearly $2 trillion over 10 years, though not a major infrastructure bill. The 10-year
yield subsequently reached as high as 3.2% before declining as global growth
slowed and the Fed started cutting interest rates.
Mr. Biden’s platform doesn’t signal as dramatic a selloff in
bonds, analysts said. Among other things, he has called for raising taxes on
corporations, which could drag on stocks and increase the appeal of bonds.
Still, estimates of his spending proposals in areas such as health care and
renewable energy infrastructure total trillions of dollars more than his tax
increases. If Democrats win Congress and the White House, it is also likely
that they would pass additional coronavirus aid.
Despite all the forces pushing down on yields, analysts say
that deficits still matter for the bond market. Earlier this year, emergency coronavirus
legislation was funded primarily through the issuance of short-term Treasury
bills with maturities of one year or less. By August, though, the Treasury
Department was ramping up issuance of longer-term debt, widening the gap
between short- and long-term yields and sparking selloffs heading into debt
auctions.
“It’s become very clear in the last three or four months
that the bigger supply especially at the longer end of the curve necessitates
[a] market concession,” said Thomas Simons, money-market economist in the Fixed
Income Group at Jefferies LLC.
If Democrats sweep, the prospect of even larger debt
auctions will likely push yields higher, said John Briggs, head of strategy for
the Americas at NatWest Markets. In addition, just a small shift in growth and
inflation expectations could put added pressure on the market as investors
re-evaluate the chances that the Fed will raise interest rates over the next
several years.
“You don’t have to have the market price in a rate hike,”
Mr. Briggs said. “It just has to start pricing in the probability of some chance
of a rate hike, which we don’t have now for so many years.”
Write to Sam Goldfarb at sam.goldfarb@wsj.com.
Click
here for the original article.