US yields post sharp gains as Trump victory triggers caution about deficits

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) -U.S. Treasuries fell sharply on Wednesday, propelling yields to multi-month highs as Donald Trump's presidential election victory ignited bets on economic policy shifts that could boost deficits and inflation.

The Republican former President swept back to power early on Wednesday, beating Democratic candidate Vice President Kamala Harris and capping a political comeback four years after he left the White House.

The benchmark 10-year Treasury yield rose to 4.479%, its highest since July, as polls also showed Republicans winning control of the Senate and a close race for the House of Representatives.

The 10-year yield, which moves inversely to the price, was last up 15.3 bps at 4.441%, on track for its biggest one-day rise since April.

U.S. yields, however, pared gains after a better-than-expected 30-year Treasury bond auction.

Trump campaigned on a platform of tax cuts, which economists say would juice the economy, widen budget deficits and increase government borrowing. He also touted tariffs, which analysts expect to stoke inflation and reduce the Federal Reserve's scope to cut interest rates.

"The risk in the market with Trump is an undisciplined fiscal situation. At some point in 2025, the deficit will grab the narrative of the market," said James Camp, managing director of fixed income and strategic income at Eagle Asset Management in St. Petersburg, Florida.

"If you believe that the gap between rhetoric and policy could be a mile-wide ... there is still an impulse from Trump on the spending side that would be bearish for bonds. The leaning in bonds is to be cautious given the results."

The yield on the 30-year Treasury note last traded 16.5 bps higher at 4.612%, after earlier hitting 4.678%, the highest since late May. It is set for its biggest one-day rise since March 2020, underscoring concerns about future borrowing.

SOLID US 30-YEAR BOND AUCTION

Wednesday's sale of $25 billion worth of 30-year bonds lured buyers after being sharply sold off. The note was priced at 4.608%, lower than the rate forecast at the bid deadline, suggesting investors did not demand extra yield to take down the note.

There were $66 billion in bids for a 2.64 bid-to-cover ratio, up from 2.50 previously and the 2.31 from the August new issue.

Meanwhile, the MOVE index, the benchmark gauge of rate volatility, hit a more than one-year high of 136.25 on Monday, suggesting Treasury yields across most maturities will move at least 8.5 basis points per day in either direction over the next month. It was last at 130.43.

Harley Bassman, creator of the MOVE index and managing partner at Simplify Asset Management, predicted that based on his calculations, option prices anticipate an outsized move of 18 basis points in Treasury yields a day or two after the election. That was roughly the size of the move so far on Wednesday.

Treasury yields surged once it became clear Trump had considerably improved on his 2020 election performance against President Joe Biden.

On the short end of the curve, the two-year yield peaked at 4.312%, its highest since late July, and last traded roughly 7.5 bps higher at 4.278%. It was on pace for its biggest one-day gain in a month.

The U.S. yield curve steepened sharply on Wednesday, with the gap between two-year and 10-year yields hitting 19.5, the highest since late September. The curve was last at 16.10 bps, from 8.8 bps late Tuesday.

The curve has been on a steepening trend for the last few months, a scenario that occurs when the Fed is cutting interest rates.

The Fed, meanwhile, kicks off its two-day monetary policy meeting on Wednesday and is expected to deliver another 25-bps rate cut, though future decisions look less certain.

Traders have reacted to the election results by trimming bets on Fed cuts next year, with rates seen staying above 4% until May 2025. The market has priced in about 42 bps of cuts this year and another 62 bps of reductions in 2025. Next year's estimate came down from about 90 bps a few weeks ago, based on LSEG's calculations.

"I start to worry when yields cross the 4.50% mark," said Matt Orton, chief market strategist at Raymond James Investment Management.

"If we don't reverse that upward trend, I would be more reticent to add too much more risk until we hear from the Fed or get a little bit more guidance with respect to where terminal rates might lie."

(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Harry Robertson in London, Davide Barbuscia in New York, Rae Wee in Singapore, and Dhara Ranasinghe in London; Editing by Christopher Cushing, Shri Navaratnam, Christina Fincher, Barbara Lewis, Richard Chang and Rod Nickel)