Bond Markets Signal Investors' Jitters Ahead of First Presidential Debate
By Paul J. Davies
Investors in Treasury markets showed signs of nervousness
Tuesday ahead of the first debate between the candidates in this
year's U.S. presidential election.
Yields fell on both 10-year U.S. government bonds and Treasury
inflation-protected securities, known as TIPS. The difference
between the two yields, called the break-even rate, shrank,
indicating a fall in inflation expectations in markets.
That rate has been the most reliable predictor of equity-market
moves this year, according to analysts and investors. When the rate
falls, stocks tend to also fall.
Yields on ordinary Treasurys slipped to 0.643% from 0.661% on
Monday. Yields on TIPS, called real yields, slid to minus 0.978%
from minus 0.961%. That left the break-even rate slightly down at
1.62%, according to Tradeweb.
The decline in the break-even rate since its peak of 1.8% at the
end of August, and the stock market's stumble in that same period,
has highlighted investors' concerns about the economic growth
outlook as a result of rising Covid-19 infections and worries about
a slowdown in stimulus efforts from governments and central
The falls Tuesday ended the more positive direction of the past
couple of days.
Mariusz Banasiak, head of local currency, rates and FX at U.S.
fund manager PGIM's fixed-income unit, said that whoever wins the
U.S. election, he expects long-term weakness for the U.S.
"I think investors will focus on the fiscal deficit and the
medium-to-long-term growth outlook is pretty poor," Mr. Banasiak
Real yields have risen from their all-time closing low of less
than minus 1.1% at the end of August, according to Tradeweb, while
yields on ordinary Treasurys have barely moved.
Investors have been focusing their attention and money more on
break-evens and real yields, because yields on normal Treasurys
have fallen so low that there is little room for them to drop
"It is hard to make an argument that nominal yields move much
lower from here," said Maya Bhandari, multiasset portfolio manager
at Columbia Threadneedle Investments.
She has built up larger holdings of inflation-protected
Treasurys in recent years, she said, but she recently sold some to
lock in profits because there had been such a dramatic run-up in
the break-even rate over the summer.
Since the start of June, the 10-year break-even rate rallied
from about 1.2% to a peak of 1.8% at the end of August, helping to
drive the rally in equities.
Tuesday's presidential debate between President Trump and his
Democratic rival Joe Biden is seen by some analysts as critical for
the level of uncertainty in the growth and inflation outlook.
"The pandemic has helped create historically challenging
circumstances for the election, including a leap in mail-in voting
that could complicate vote counting, delay results and trigger
legal challenges," wrote Mike Pyle, global chief investment
strategist at the BlackRock Investment Institute, in a note. "We
see a material risk of a contested election or a delayed result.
Election Day could turn into weeks or months."
Write to Paul J. Davies at email@example.com
(END) Dow Jones Newswires
September 29, 2020 14:15 ET (18:15 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.