Treasuries Erase Losses as U.S. Election Spurs Flight to Safety

(Bloomberg) -- Treasuries erased losses, after benchmark yields reached the highest since May, as investors sought safer assets before the Federal Reserve's interest-rate decision on Wednesday and the U.S. elections next week.

Benchmark yields fluctuated as U.S. equities declined. The market-based probability of a Fed rate hike by its December meeting fell below 70 percent, from as high as 75 percent earlier Tuesday. Government bonds tumbled last month as investors reconsidered how much longer central banks in advanced economies will maintain exceptional monetary policy amid signs global inflation is accelerating.

With just one week until U.S. presidential elections, investors across markets are watching for surprises after they were caught off-guard by the U.K. vote to leave the European Union in June. An ABC News/Washington Post tracking poll showed Republican Donald Trump with 46 percent support versus Democrat Hillary Clinton's 45 percent, leading to gains in havens such as Treasuries, gold and the Swiss franc.

“The latest information has put the election into question -- before that, it looked like Mrs. Clinton would win,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the Fed's 23 primary dealers. While he still doubts Trump will win, “there are a lot of question marks out there, and as it becomes more unclear as we go into next Tuesday, the market is going to be less liquid and it's going to be more volatile.”

Treasury 10-year note yields were little changed at 1.83 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They touched 1.88 percent earlier, the highest since May 31. The price of the 1.5 percent security due in August 2026 was 97 2/32.

Treasuries had joined a slump in sovereign debt across the developed world as a report showing an unexpected pickup in Chinese manufacturing fueled optimism about the outlook for the global economy. In the U.S., the Institute for Supply Management's survey of U.S. factory production released Tuesday rose to 51.9 in October from 51.5 the previous month. The median forecast in a Bloomberg survey called for 51.7. A reading above 50 signals expansion.

At the same time, inflation expectations are ramping up. The yield spread between 10-year U.S. Treasury bonds and similar-maturity Treasury Inflation Protected Securities, or TIPS, is 1.74 percentage points, the highest since July 2015 on a closing basis.

U.S. 10-year note yields climbed 23 basis points in October, the most since June 2015.

“Market participants have reversed the very pessimistic view about the global economy,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. Positive growth numbers from the U.S. and the U.K. last week along with rising inflation rates globally underpinned that view, she said.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Mark Tannenbaum