The bond market already priced in a Democratic clean-sweep, says SocGen
By Sunny Oh
The yield curve's slope suggests Wall Street has more than baked in a comprehensive victory for Democrats in Nov. 3
Investors might not have to worry about volatility in U.S. Treasurys, the biggest part of America's debt market, if Democrats preside over a clean sweep of the White House and Congress in next week's elections.
Analysts at Société Générale see signs in the Treasury market, typically viewed as a safe haven for investors, that point to Wall Street already more than baking in the risk of a landslide victory for Democratic candidate Joe Biden.
A lingering fear has been that investors could spark a rout in bonds if they react skittishly to Democrats taking over Washington for the next four years in anticipation of additional government spending.
But based on where stocks stand against Treasurys since the pandemic in March, the slope of the yield curve -- a key economic indicator -- already has steepened to levels beyond what the S&P 500 would imply about the broader economy's health.
This chart maps the difference between 5-year and 30-year Treasury yields, or their slope higher, since the depths of COVID-19 market lows on March 23. But it also overlays prices for the S&P 500, a forward-looking indicator of potential corporate growth, which mostly have tracked the yield curve's slope during the pandemic.
Flatter yield curves widely are viewed as a reliable indicator of economic retraction. Back in early February, that was precisely the signal coming from the bond market, at least when looking at the difference between 3-month and 10-year Treasury yields.
Read: Inverted U.S. yield curve points to renewed worries about global economic health (https://www.marketwatch.com/story/flattening-us-yield-curve-points-to-resurfaced-worries-about-global-economic-health-2020-01-29)
The yield curve now suggests that bond-market bears may have overestimated the additional growth and inflation spurt that could arise from a Biden victory. But it also points to a Democratic clean-sweep that wouldn't immediately spell problems for the bond market.
"Anticipation of an increase in personal income taxes and a reversal of corporate tax cuts could lead to a sharp repricing in equities and other risk assets, which could lead to an initial flight-to-quality rally in Treasuries. But as markets grasp the possibility of significantly higher deficits to fund a multi-trillion-dollar budget, we could see modestly higher yields," said Société Générale.
Even the alternative scenario of a divided government likely would be a boon for bonds as prolonged uncertainty stokes demand for safe-haven assets.
Ultimately, Société Générale analyst said it was difficult to envision the 10-year Treasury yield making a sustained breakout above 1%.
That seems a safe bet, given the unprecedented monetary support being provided by the Federal Reserve since the onset of the pandemic, including its policy of keeping benchmark rates near zero for several years to come and its continuing asset purchases in U.S. Treasurys, government-backed mortgage bonds and corporate debt.
The benchmark 10-year Treasury maturity currently trades at 0.857%. Bond prices move inversely to yields.
-Sunny Oh; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
October 30, 2020 13:27 ET (17:27 GMT)
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