US bond premium turns positive again amid election uncertainty By Reuters

By Davide Barbuscia

NEW YORK (Reuters) – The 10-year U.S. Treasury yield, a measure of the compensation investors demand for holding long-term government debt, returned to positive territory this week as U.S. economic resilience defied expectations of aggressive interest rate cuts and election uncertainty weighed on long-term bonds.

Term premiums were largely suppressed for about a decade amid the low interest rates that followed the 2007-2009 global financial crisis and the COVID-19 pandemic, but have crept back in the past two years amid long-term fiscal concerns and expectations. inflation will remain sticky.

On Monday, the 10-year prime, as measured by a gauge of the Federal Reserve Bank of New York, turned positive for the first time since July 25, New York Fed data showed on Wednesday. It stood at 0.034% on Monday from minus 0.047% on Friday.

The move comes after a rise in Treasury yields following strong U.S. jobs data last week, which prompted investors to reduce bets on the extent of future interest rate cuts by the Federal Reserve. Benchmark 10-year yields, which hit a more than one-year low in September on expectations of easing monetary policy, have since risen to above 4% and on Wednesday were at their highest level since the end of the month July.

Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said the rise in term premiums could also indicate that markets are betting on higher government deficits under a Donald Trump presidency, should he win the election presidential race on November 5 against Vice President Kamala Harris.

A new Reuters/Ipsos poll this week showed Harris leading Trump by a marginal three percentage points — 46 percent to 43 percent — a narrower lead than indicated in a Sept. 20-23 Reuters/Ipsos poll.

“What we’re seeing is that as the odds go up for former President Trump, the longer end of the (Treasury yield) curve goes up,” Miskin said. “It could very well be that the Treasury market sniffs out higher deficit spending, which would then create more supply and higher yields for long-term maturities.”

US bond giant PIMCO said earlier this year it expected term premiums to rise again amid persistent inflation and growing fiscal deficits. The bond asset manager said in a report Wednesday that widening U.S. deficits and inflationary trade policies after the Nov. 5 election could hurt Treasuries over the long term, despite the near-term outlook for lower rates.

Expectations for inflation over the next decade, measured by the difference between nominal 10-year Treasury yields and inflation-protected 10-year Treasury yields, hit 2.284 percent this week, the highest since July 22.