Treasuries Fall as Early Election Analysis Signals Clinton Edge

(Bloomberg) -- Treasuries declined, with benchmark 10-year yields reaching the highest level since May, as preliminary U.S. election analysis signaled Hillary Clinton may be garnering more early votes in key battleground states.

Yields rose for a second day across maturities as Americans cast their ballots amid polls showing Clinton ahead of Donald Trump in the race to the White House. A gauge of the yield curve flattened as shorter-dated securities underperformed.

Traders monitoring the election are taking into consideration results of straw polls like one from Guam on Tuesday morning that showed Clinton winning, as well as the odds offered by betting websites. Clinton has likely earned more early votes than Trump in states including Florida and New Hampshire, according to analysis by Slate's Votecastr. A Bloomberg News survey of primary dealers showed respondents forecast Treasury yields to rise if Clinton wins and tumble if Trump is the victor.

“The market is so focused on this election that you have to acknowledge the relevance of these small bits and pieces of election data as they come in, even as they may not be meaningful,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, one of 23 primary dealers that trades with the Federal Reserve.

Benchmark Treasury 10-year note yields rose three basis points, or 0.03 percentage point, to 1.85 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data, the highest closing level since May 25. The 1.5 percent security due in August 2026 fell 1/4, or $2.50 per $1,000 face amount, to 96 27/32.

Fed Outlook

The gap between yields on five- and 30-year debt, a measure of the yield curve, fell to about 129 basis points, the lowest closing level in a week. 

Traders assign about an 84 percent probability to a Fed interest-rate increase in December, according to data compiled by Bloomberg based on fed funds futures, up from 80 percent on Monday. The calculation is based on the assumption the effective federal funds rate will trade at the middle of the new range after the central bank's next increase.

Clinton, a Democrat, is considered a continuity candidate whose election would likely do little to change the Fed's plan to raise rates gradually. Donald Trump, the Republican candidate, is viewed as more unpredictable and has accused the central bank of playing politics under the leadership of Chair Janet Yellen.

“Clinton is the known quantity -- we know what she intends to do, she's published a very detailed platform,'' said Gennadiy Goldberg, an interest-rate strategist in New York at TD Securities (USA) LLC, a primary dealer. “A Trump victory is generally expected to be a risk-off event. There are a lot of unknowns and it's expected to be widely negative for risk sentiment.”

A gauge of investor demand fell to match the lowest level since 2009 at a $24 billion Treasury three-year note auction.

To contact the reporter on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Michael Aneiro