TREASURIES-Yields hit three-month high on election uncertainty, economy

(Updated at 1500 EDT)

By Karen Brettell

NEW YORK, Oct 23 (Reuters) - Benchmark 10-year Treasury yields reached a three-month high on Wednesday on growing uncertainty about the Nov. 5 U.S. presidential election, and as investors priced in the likelihood of a less dovish Federal Reserve due to the strong economy.

Yields have ratcheted higher this week and 10-year yields have broken above key technical levels, including the 200-day moving average and the 50% Fibonacci retracement from their April to September fall.

"The markets are worried about the next president and spending, whether it's Harris or Trump," said Tom di Galoma, head of fixed-income trading at Curvature Securities.

Some of this week's move higher in yields has been attributed to rising odds that Donald Trump will win the U.S. presidential election, with policies including tariffs and crackdowns on illegal immigration seen as sparking higher inflation.

Betting site Polymarket shows a 64% chance of Trump winning and a 36% probability of a victory by Kamala Harris.

Many investors are also generally hesitant to buy bonds before the results of the election become clear, with the fiscal outlook also depending on whether one party secures a majority in Congress.

"It seems like a little bit of a buyer's strike going into the election, at which point I would expect a lot of money to be deployed," said Dan Mulholland, head of rates - sales and trading at Crews & Associates in New York.

"Along with that has also been a lot of strong data, so it's kind of a rethinking of the Fed's terminal rate, where we're going to end up," he said.

Benchmark 10-year note yields were last up 3.6 basis points at 4.242% and earlier reached 4.260%, the highest since July 26.

Two-year yields rose 4.7 basis points to 4.084%, the highest since Oct. 10. The yield curve between two-year and 10-year yields flattened to 15.6 basis points.

Traders priced out the likelihood of the U.S. central bank making further 50 basis point interest rate cuts following a much stronger employment report for September than was anticipated.

The market now sees a 67.1% chance of a 25 basis point cut at both of the Fed's November and December meetings, a 30.2% chance of a cut at only one meeting and a 2.7% probability the Fed will keep rates steady through year end, according to the CME Group's FedWatch Tool.

U.S. economic data this week is relatively light, with investors waiting on key releases next week including the Nov. 1 jobs report for October for further clues on Fed policy.

Data on Wednesday showed that U.S. existing home sales dropped to a 14-year low in September, weighed down by higher mortgage rates and house prices.

The Fed's Beige Book found that U.S. economic activity was

little changed

from September through early October while firms saw an uptick in hiring.

The Treasury Department saw soft demand for a $13 billion sale of 20-year bonds.

The debt sold at a high yield of 4.59%, around one and a half basis points above than where they traded before the auction.

Demand was 2.59 times the amount of debt on offer, the highest since July.

The government will also sell $24 billion in five-year Treasury Inflation-Protected Securities on Thursday.

(Reporting By Karen Brettell; Editing by Sharon Singleton and Diane Craft)