Tuesday, October 13, 2020

Election implications for bond yields

In Investors Prepare for Higher Treasury Yields as Election Looms, WSJ's Sam Goldfarb writes that yields have risen in response to polls showing a growing lead for Joe Biden and improving chances that Democrats do well in the Congressional races.

"For debt investors, the key isn't necessarily whether Mr. Biden or Mr. Trump wins. It is whether one party or another has unified control of government, making it easier to expand the federal budget deficit through tax cuts or spending programs.

"Bigger deficits can push yields higher for two reasons: first, by increasing the supply of outstanding bonds as the government ramps up borrowing and, second, by potentially boosting economic growth and inflation, which makes bonds less attractive."

The Treasury Department initially funded most of the coronavirus stimulus with short-term Treasury bills with maturities of one year or less. Since August, it has ramped up issuance of longer-term debt, widening the gap between short- and long-term yields. But many factors, including a contested or uncertain election and Federal Reserve actions, could keep interest rates low across the yield curve.

"A sustained move higher in Treasury yields could be difficult to achieve. Not only is the economy suffering due to the pandemic, but its average growth rate outside of recessions has declined in recent decades. At the same time, inflation has remained stuck below the Federal Reserve's 2% annual target. As a result, investors widely expect the central bank to hold short-term interest rates near zero for years and to keep buying Treasurys--both policies that should constrain longer-term yields."

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