As the U.S. election approaches, the U.S. Treasury market has experienced its worst monthly performance in over two years, influenced by several factors including supply outlook, the U.S. election, and potential fiscal deficit threats. Although on Tuesday, a drop in job vacancies temporarily boosted Treasuries, the subsequent rise in consumer confidence data limited the gains. The market generally expects the Federal Reserve to cut rates by 25 basis points next week, but this move has not effectively driven the bond market upward. Bond investors remain more cautious in the face of supply pressure, interest rate expectations, and uncertainty in future economic policy.
Since the beginning of the month, the total return index for unhedged U.S. Treasuries has fallen by 2.4%, while the yield on 10-year Treasury notes has climbed 60 basis points, with the term premium reaching a yearly high. The ICE BofA MOVE Index indicates that Treasury volatility is at its highest point of the year, with increased investor expectations for upcoming market turbulence. According to the U.S. Treasury's latest quarterly borrowing plan, the U.S. is likely to maintain a record scale of Treasury issuance in the next three months, with a potential further expansion of issuance next year.
On the eve of the election, Trump's budget and tax cut policies are becoming a "nightmare" for bond market bulls. The market believes that if Trump and Republicans win the election, the federal budget gap could expand significantly, with policies expected to increase the deficit by $7.5 trillion over the next decade. Trump's proposed tariff and immigration control measures could drive up inflation, further exacerbating the upward trend in Treasury yields. As betting markets show an increased likelihood of Trump's victory, long-term Treasury yields continue to rise, reflecting investors' concerns about deficit expansion.
Currently, institutions like Loomis Sayles are warning investors not to "bottom fish" U.S. Treasuries lightly, pointing out that the selling pressure on Treasuries may continue. With expected post-election fiscal spending, tensions in the Middle East, and persistent inflation working together, the 5-year Treasury yield may rise further to around 4.5% in the next three months. In the coming days, the Treasury market will still face a series of risks, and traders will be more cautious in dealing with volatility and political-economic uncertainty.
