Two-Year Treasury Yield Hits Two-Month Low as Democrats Sweep Midterms
The two-year U.S. Treasury yield fell to 4.546% in Asian trade on Wednesday, its lowest level in two months, as early midterm results pointed to a Democratic sweep. The Wall Street Journal reported the move. The yield later recovered slightly, with its most recent trade 0.8 basis points lower. A basis point is one-hundredth of a percentage point. Yield moves inversely to price, so a lower yield means bonds were bid higher.
The move followed a session in which Treasuries were already in demand. CNBC reported that yields fell on Tuesday night as investors sought shelter from a sell-off in equity futures, which was sparked by large Democratic victories in the midterms. The benchmark 10-year Treasury note yield fell 6 basis points to 4.906%, according to Reuters.
Currency markets moved in the same direction. Reuters reported that the dollar fell sharply against major currencies as early results pointed to Democratic gains, and that Treasuries rallied and the dollar softened on Wednesday as Democrats notched early Senate wins. Reuters analysts' reaction coverage described Treasury yields dipping and dragging the dollar lower.
The election outcome is now largely reported. The Associated Press reported that Democrats won control of both the House and the Senate, giving them full control of Congress. Prediction markets had been moving the same way beforehand. According to Business Recorder, prediction markets signalled growing expectations of a Democratic sweep, and more than $1.48 billion was wagered on the midterms on those platforms.
On the yield curve, the line plotting yields from short maturities to long ones, the two-year note is the part most sensitive to expectations for the central bank's policy rate. Its move is the one most often read as a repricing of the path of short-term rates. The 10-year, which carries more exposure to growth and inflation expectations and to term premium (the extra yield investors demand for locking money up longer), moved less.
In my view, that gap is the thing to watch. A rally concentrated at the front of the curve looks different from a rally spread across it.
The equity futures sell-off complicates a simple read. If the bond rally was mainly a flight to safety, it should fade as stock markets settle. If it reflects a change in expectations about fiscal policy or the rate outlook under a Congress controlled by one party, the move could persist and extend into longer maturities. Traders will want to see whether the 10-year's smaller move catches up with the two-year's, and whether the dollar's decline holds once Asian and European trading gives way to U.S. hours.
For savers and borrowers, the practical translation is narrower. Lower Treasury yields typically pull down benchmark rates on new government-linked borrowing and feed into pricing across other fixed income. A weaker dollar changes the cost of imports and of dollar-denominated assets held abroad. Neither effect is immediate or uniform, and both depend on what yields and currencies do over the coming sessions rather than on the first reaction to an election result.
