TREASURIES-US yields tumble as 'Trump trades' unwind, Harris gains momentum

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Iowa poll shows Harris ahead of Trump, weighs on yields

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US 10-year yields on track for largest fall since early Aug. 2

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US two-year yields show biggest decline in two months

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US yield curve bull flattens

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US Treasury to sell three-year notes in auction

By Gertrude Chavez-Dreyfuss and Alun John

NEW YORK/LONDON, Nov 4 (Reuters) -

U.S. Treasury yields fell across the board on Monday as traders looked to square positions ahead of Tuesday's presidential election, moves shaped in part by a poll showing Democratic candidate Vice President Kamala Harris with a surprise lead in Iowa over Republican former President Donald Trump The yield on the benchmark U.S. 10-year note fell 9 basis points (bps) to 4.28%, on track for its largest daily fall since late August. The U.S. two-year Treasury yield fell for the first time in six days, down 6.8 bps at 4.135% and on pace for its biggest one-day decline in two months.

"What has pushed yields up over the past month was Trump doing better. But over the last week, his momentum has definitely waned and has switched over to Harris and generally the rate outlook is lower with a Harris victory," said Stan Shipley, fixed income strategist, at Evercore ISI in New York.

"And the you had so much rise in rates that people were taking some profits here. A lot of people were one-sided on the risk-taking and they have gone to neutral given that elections are 50-50."

U.S. yields had been rising in the past few weeks as investors put on trades betting Trump could be president again.

The current market consensus is Trump's policies on immigration, tax cuts and tariffs would put upward pressure on inflation, bond yields and the dollar, and the 10-year yield has risen over 50 basis points since the start of October.

Part of this rise in yields has been down to economic data that has come in better than many had feared, causing markets to reprice expectations for the Federal Reserve's rate cut path. Yet analysts at JPMorgan said about 21 bps of the recent move higher in 10-year yields was accounted for by expectations the Republican party could win the Presidency and both houses of Congress.

The weekend poll showed Harris leading Trump 47%-44% in Iowa, which has been trending deeply Republican in recent years. It is within the 3.4 percentage point margin of error, and other polling shows the race is tight in the country's seven key battleground states. Other asset classes were also moving to reverse some Trump trades. The dollar was also weaker on the day against most major currencies , and dropped 0.7% on the rate-sensitive Japanese yen to 151.94 yen Also in the mix for U.S. Treasuries was last Friday's data showing nonfarm payrolls increased by 12,000 jobs last month after surging by a downwardly revised 223,000 in September. Economists polled by Reuters had forecast payrolls rising 113,000.

Yields initially fell on the news, but rose late in the day on Friday, which analysts attributed to nervousness ahead of the election. The U.S. yield curve bull flattened with the gap between two-year and 10-year yields at 13.4 bps, down from 17.2 bps on Friday, and unwinding, at least temporarily, the curve steepening in place for the last few weeks.

A bull flattener is a scenario in which long-term rates are falling faster than shorter-dated maturities, which can reflect flight-to-safety trades with the election coming up on Tuesday. Also later on Monday, the U.S. Treasury will auction $58 billion in three-year notes. The Treasury in its refunding announcement last week said it does not anticipate increasing auction sizes for notes and bonds for at least the next several quarters.

But given the proximity of the election, the auction will likely see less demand with market participants likely sidelined, analysts said.

"The outlook for Washington DC assumes ever-increasing deficit spending, and future issuance assumptions will remain heavily dependent on the fiscal actions taken by the new administration," wrote BMO Capital Markets in a research note.

(Reporting by Alun John; Editing by Amanda Cooper)