U.S. long-dated yields rise before CPI, amid uncertain midterms result

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LONDON/NEW YORK — U.S. yields on the

long end of the curve rose in choppy trading on Wednesday as

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results for the midterm elections so far have not shown the

widely-anticipated sweeping “red wave” Republican victory,

leaving investors to focus on the upcoming inflation data.

U.S. yields also fell after a lackluster 10-year note

auction, with demand affected by uncertainty surrounding

Federal Reserve policy and caution on the looming consumer price

index report.

Control of Congress was up for grabs late on Wednesday, with

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many of the most competitive races uncalled, meaning it was

unclear whether Republicans would crack the tenuous hold on

power by President Joe Biden’s fellow Democrats.

On Tuesday, U.S. yields fell on some expectation of a

Republican victory in both chambers that would result in a split

government. Investors expect that a Republican majority would

curtail Biden’s ability to pursue expansive fiscal policy plans,

a good scenario for bonds.

Using more fiscal measures would mean higher U.S. borrowings

through more issuance of Treasuries. An increase in the supply

of Treasuries would drive down their price and lift yields.

“There is a tiny chance that Democrats keep both chambers.

If that were to be the case, you would have a situation where

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Congress would have more ability to ease from a fiscal

perspective, which would put pressure on the Treasuries market,”

said Andrzej Skiba, head of U.S. fixed income at RBC Global

Asset Management in Stamford, Connecticut.

“However, the likelihood that Democrats hold on to the House

of Representatives is very low,” Skiba added.

While a Republican-controlled House, along with a Democratic

president, would likely curb spending, it also could set the

stage for another fight over raising the U.S. debt ceiling next

year – effectively leading to political gridlock.

In afternoon trading, yields on the benchmark 10-year note

were up 2.5 basis points (bps) at 4.153%, while

those on the two-year note, which tend to reflect

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U.S. rate move expectations, were down 4 bps at 4.629%.

Not helping matters was a poorly-subscribed U.S. 10-year

note auction. The $35 billion offering stopped at a high yield

4.140%, or about 4 basis points higher than the expected rate at

the bid deadline, suggesting investors demanded a premium in

taking on the 10-year note.

Research firm Action Economics said the high yield was the

highest since June 2008, while the rate miss was the largest

since December 2009.

U.S. 30-year yields were up 5.4 bps at 4.314%.

The more immediate focus though for investors was on

Thursday’s inflation report, which could shape Federal Reserve

monetary policy in the months to come.

Thursday’s report on the consumer price index is expected to

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show a year-on-year rise of 8%, moderating slightly from

September’s 8.3% rate, while the core rate, which excludes food

and energy prices, is forecast to have risen by 6.5%, up from

6.3% the month before.

“Unless we get a huge miss or it comes well under

expectations, which we’re not projecting, it’ll just be one data

point the Fed takes into consideration,” Jonathan Mondillo,

abrdn’s head of North American fixed income, told the Reuters

Global Markets Forum on Wednesday.

“(Fed Chair Jerome) Powell was clear they’re looking for

more than just one data point before they hit the pause button

or reverse course. It’s an important data point of course, but

given job growth, wage growth towards the upside, consumer still

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seems strong – it would take an awful lot for the Fed to reverse

course at this stage.”

The futures market currently shows investors believe the

target federal funds rate will peak around 5.1% by next June,

from a range between 3.75% and 4% right now, and the chances of

a rise of 50 or 75 basis points are tilted in favor of a

half-point increase next month.

November 9 Wednesday 3:02PM New York/2002 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.1025 4.2031 0.003

Six-month bills 4.4525 4.6183 -0.006

Two-year note 99-135/256 4.6278 -0.044

Three-year note 99-234/256 4.5309 -0.048

Five-year note 99-72/256 4.2868 -0.021

Seven-year note 98-180/256 4.2164 0.000

10-year note 88-212/256 4.1531 0.025

20-year bond 85-20/256 4.5249 0.040

30-year bond 78-8/256 4.318 0.058

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 35.00 0.25

spread

U.S. 3-year dollar swap 14.25 -0.75

spread

U.S. 5-year dollar swap 5.00 -1.00

spread

U.S. 10-year dollar swap -0.50 -1.25

spread

U.S. 30-year dollar swap -49.75 0.00

spread

(Reporting by Amanda Cooper in London and Gertrude

Chavez-Dreyfuss in New York; Additional reporting by Bansari

Mayur and Lisa Pauline Mattackal in Bengalaru; Editing by Alison

Williams, Will Dunham and Alex Richardson)