Treasuries Slip on Election Day as Volatility Hits One-Year High

The fresh dose of robust US data on Tuesday brought back to the forefront a driver behind the jump in yields since the Fed cut rates by a half-point in September. The US service sector expanded in October at the fastest pace in over two years, fueled by a pickup in hiring.

Two-year yields rose to a multi-month high around 4.24%, while the 10-year rate climbed as much as eight basis points to 4.36%, nearing an over three-month high. With strategists and investors warning of outsized swings no matter the outcome of the US presidential vote, a measure of bond volatility closed on Monday at the highest in more than a year.

Across all maturities yields rose by at least about five basis points, with increases in shorter-tenor debt leading the move. Adding to the upward pressure on yields, the supply of 10-year notes is set to increase with a $42 billion auction Tuesday. A sale of three-year notes on Monday drew tepid demand.

The ICE BofA MOVE Index, a measure of expected fluctuations in yields, reached the highest level since October 2023 on Monday. Early Tuesday trading in options on interest-rate swaps suggested the outlook for volatility will stay high. And rate strategists at Citigroup Inc. said options on Treasury futures were priced for a move of 22 basis points in 10-year yields by Friday, the highest election-week premium since 2012.

For weeks, betting markets were leaning toward a Trump victory and traders positioned for his low-tax and high-tariff policies to fuel growth and inflation. The so-called Trump trade boosted the dollar to the strongest level in almost four months and brought the 10-year Treasury yield to 4.38% last week from about 3.6% in mid-September.

But markets scaled back those wagers after a weekend poll cast doubt on Trump’s potential victory. A Des Moines Register/Mediacom Iowa poll showed Harris with a three percentage-point lead in the state Trump previously won twice by comfortable margins.

“The risks to the 10-year yield are skewed to the downside” even if Trump wins and Republicans gain control of both houses of Congress “as you could see a ‘buy the rumor, sell the news’ type of dynamic,” said Zachary Griffiths, head of US investment grade and macro strategy at CreditSights. That’s likely to be the case “as long as the Federal Reserve remains committed to normalizing policy.”

The Fed’s next policy meeting concludes Thursday, and swaps traders are pricing in an over 90% probability the central bank reduces rates by a quarter-point.

Options traders are also preparing for swings in the euro. The currency’s overnight implied volatility — the cost of buying protection against upcoming moves — surged on Tuesday and is headed for its biggest daily jump since 2008.

“Harris is the status-quo outcome for policy but not necessarily for markets,” said Meera Chandan, co-head of global FX strategy at JPMorgan Chase & Co., in a Bloomberg TV interview. “If she becomes president you take out a major tail risk on tariffs for markets.”

Chandan is working with a wide range of currency forecasts depending on the outcome of the vote. If Harris wins, she said the euro could rise to as high as $1.15, from about $1.09 now, while if there’s a Republican sweep the currency could slide to parity with the dollar.

“With an exceptionally close US election upon us, the outcome is likely to deliver a binary impact on currency markets,” said Chris Turner, head of FX strategy at ING. “Only a red sweep outcome can probably add to the dollar’s upside.”

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