US Bonds slip as market volatility hits one-year high amid US election results; Spot dollar index down

(Bloomberg) -- US Treasuries fell and a gauge of bond volatility rose to the highest in a year as traders counted down to a presidential election that remains too close to call.

The yield on 10-year Treasuries rose three basis points to 4.31%, nearing a three-month high, with strategists and investors warning of outsized market swings on the results of the vote. The ICE BofA MOVE Index, a measure of implied fluctuations in yields, on Monday hit the highest since October 2023. 

The Bloomberg Dollar Spot Index dropped 0.1%. Currency volatility also jumped, taking the cost of hedging the euro against the greenback to the highest in more than four years.

The US presidential race is deadlocked, with polls showing Americans narrowly split between Donald Trump and Kamala Harris. That sets the stage for market volatility whoever wins, especially if the elected president’s party also takes both houses of Congress.

“Markets are in a wait-and-watch mode,” said Mohit Kumar, chief European strategist at Jefferies. “A number of investors have been sitting on the sidelines waiting for the event risk to be out of the way.”

For weeks, betting markets favored 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. 

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.

“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, while if there’s a Republican sweep the currency could slide to parity with the dollar.

Options traders are also preparing for wild swings on 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. 

JPM’s Chandan said commodity currencies like the Brazilian real and the Colombian peso could come under pressure on a Trump win. That outcome could also hurt the yuan, though stimulus from China’s government could offset the move. 

A lot also depends on how soon the election is decided. A close call, or a situation that requires recounts could drag the process on, prolonging a period of uncertainty in markets. BlackRock Investment Institute recently said the risk of a disputed victory is underpriced.

“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.”

--With assistance from Vassilis Karamanis.

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