US Treasury Yields Reach Three-Month Highs

US Treasury yields have hit three-month highs as traders evaluate Federal Reserve interest rate policies and the upcoming US presidential election.

By 08:38 ET (12:38 GMT) on Wednesday, the yield on the benchmark US 10-year Treasury note rose 0.04 percentage points to 4.246%. This increase follows a series of recent gains after the Fed cut its key federal funds rate by 50 basis points to a range of 4.75% to 5% in September.

Initially, traders expected a full percentage point reduction by January following the Fed's significant cut. However, strong economic data and concerns about the deficit have led to a recalibration of those expectations, now suggesting around a half-point reduction.

As yields, which move inversely to prices, increased, the US dollar reached multi-month highs, affecting the euro and yen negatively.

Analysts at BCA Research noted the resurgence of the “Trump trade” contributing to the uptick in yields this week. Prediction markets like Kalshi and PredictIt favor Trump in the presidential election on Nov. 5, despite national polls showing his rival Kamala Harris with a slight lead.

Both candidates are nearly tied in crucial battleground states that will significantly influence the election outcome.

Should Trump win, known for advocating tax cuts and less stringent financial regulations, inflation could rise, leading to slower decreases in US rates. BCA analysts warn that this situation will likely continue for several months if Trump is reelected. They assert that a “red sweep” — where Trump wins and Republicans control Congress — could create considerable uncertainty affecting inflation, public debt, and monetary policy.

This scenario would necessitate a higher risk premium on US bonds, resulting in a wider term premium. Outside the US, emerging-market currencies may depreciate and fixed-income markets could experience difficulties in the months ahead.