(October 2020)
Anyone watching the fixed income markets this week will have noticed a surprising and worrying trend: the yield curve steepened without any real positive signs from the economy. The spread between five-year and thirty-year Treasuries reached its highest point since 2016 this week. The reason why is that with Trump having COVID, markets have been betting more on a Biden victory and a possible blue sweep. That has raised expectations for more debt issuance as part of additional stimulus, all of which would change the supply and demand picture in the Treasury market.
(New York)
FINSUM + Magnifi: This is a significant risk for the bond market. It seemed unlikely just a couple weeks ago that the election would be anything other than a dead heat right through election day and after. But Trump’s diagnosis has changed the market’s calculus, and it is easy to imagine a big spike in bond yields if Biden continues to build momentum—and investors worry about resulting US credit-worthiness. This is a tail risk to look out for.
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