(Bloomberg) — US Treasuries declined for a third day amid expectations the Federal Reserve will cut interest rates at a gradual pace and traders fretting over potential inflationary implications tied to the US election.
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The selloff caused yields to advance across maturities on Wednesday, with the benchmark 10-year rate reaching about 4.26%, its highest since July. Rising speculation in betting markets that former President Donald Trump will win the Nov. 5 vote is also helping push up yields as he’s seen as likely to stoke growth and inflation through an agenda of tax cuts and steeper tariffs. Signs of a resilient US economy and stubbornly high inflation have also fueled the move.
“A lot of people had assumed: ‘Hey, the Fed started the cutting cycle, so yields are going down,’”said Kathryn Kaminski, chief research strategist and portfolio manager at quant fund AlphaSimplex Group. “And when that didn’t come to fruition, there’s repricing of those expectations.”
Swaps prices reflect less than a 100% certainty that the central bank reduces rates at each of its two remaining policy meetings this year. The bond market is also trimming bets on the degree of Fed rate reductions over the next year. Traders will get more clarity next week on how much officials are likely to ease, with the release of a key labor-market reading for October.
The price of options that protect against an extended slump in Treasuries has soared to the highest this year amid concerns that losses may deepen. Treasuries have lost 2.1% this month through Tuesday, according to a Bloomberg index, following five months of gains.
At AlphaSimplex Group, the systematic models remain net long Treasuries, though as the trend signals weakening during the recent selloff, those positions have been trimmed, Kaminski said.
“There’s been a little bit of a pendulum swing with a repricing of Fed expectations after the recent inflation data and strong labor-market data – so yields are selling off,” she said.
Yields remained higher after the Treasury department sold $13 billion of 20-year bonds, auction at a rate of 4.590%, the highest since May and above where the when-issued securities trades just as the bidding for the debt completed.
The slide in US government debt comes in contrast to a rally in short-term European bonds as traders add to wagers that the European Central Bank will lower rates by half a point in December to prop up the bloc’s flagging economy.