10-year U.S. yield drops sharply after elections show no clear winner

A 10-year U.S. Treasury yield dropped sharply on Wednesday after initial results of the U.S. presidential election didn’t yield a clear winner to send markets into the risk-off trading sentiment.

Fundamental analysis: The largest single-day decline since March

The prospect of contested elections was ranked as low probability yesterday as polls showed the Democratic candidate Joe Biden leading the race. However, a tight race sent the 10-year government bond yield from a five-month high of 0.945% to 0.758%.

Today’s drop of more than 15 basis points is on the way to become the largest since the pandemic-fueled market crisis from March. 

“The long end of the Treasury market was short heading into last night. And the price action very indicative as the lack of a Blue wave became apparent,” Gregory Faranello, head of U.S. rates trading at AmeriVet Securities, said in a note on Wednesday.

Investors started to shift their holdings into low-risk assets after Trump falsely said that he won the race and warned he will push election results to the Supreme Court. 

“We’ll be going to the U.S. Supreme Court, we want all voting to stop. We don’t want them to find any ballots at 4 o’clock in the morning and add them to the list,” he said. 

One thing is for sure – the menu of likely outcomes has narrowed severely, says John Hardy, head of FX Strategy at Saxo Bank. 

“The fall-out and reckoning from this election will echo for years, but the headline is that we have witnessed a second “Trump-quake” repeat from 2016, as least in terms of his strength in the polls relative to what the mainstream polling industry was predicting,” he said. 

“The chief uncertainty is the last portion of the counts in states like Wisconsin, Michigan and Pennsylvania, the three key states that were the difference for Trump in 2016. Late mail-in votes there tilt Democratic and are still keeping a sense of suspense, as is the tight situation in Nevada.”

Technical analysis: Large correction lower

The uncertainty is likely to increase demand for safe haven assets with a 10-year yield now threatening to break below the ascending trend line near 0.76%. Yields move inversely to prices.

A 10-year government bond yield (TradingView)

The 10-year yield has also now broken below the 100-DMA as it targets 200-DMA next amid the heightened uncertainty.

Summary

Investors are shifting their assets to safer havens amid a huge uncertainty about the outcome of 2020 U.S. presidential elections. 

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