Treasury yields fell sharply and the dollar weakened as investors pared bets on Republican Donald Trump prevailing in Tuesday’s US election.
The yield on 10-year Treasuries dropped as much as 12 basis points to 4.26% in US trading after a new poll suggested traders were underestimating the prospect of a win for Democrat Kamala Harris. The Bloomberg Dollar Spot Index slid as much as 0.7%, while the Mexican peso — which has suffered from Trump’s talk of tariffs — was one of the biggest gainers among major currencies. Bitcoin, which has climbed on Trump’s support of cryptocurrencies, slipped.
The moves signal a widespread re-evaluation of so-called Trump trades after polling data cast doubt on that result. A Des Moines Register/Mediacom Iowa poll showed Harris with a 3 percentage-point lead in the state over Trump, and could be a bellwether for how Harris performs in nearby Wisconsin — one of seven swing states. Still, an NBC News poll released Sunday showed the race remains deadlocked.
“As we move closer to the US election there is less confidence that Trump will win the election,” said Lee Hardman, a senior currency analyst at MUFG. “A Trump win and Red Sweep would be the most bullish outcome for the US dollar, while a Harris win with a divided Congress could see the US dollar quickly giving back last month’s strong gains.”
A red sweep refers to Republicans winning not only the presidency, but also both houses of Congress.
In recent weeks, investors have been betting on a Trump win, positioning for his low-tax and high-tariff policies to boost both growth and inflation. Those bets helped boost the dollar gauge to a four-month high last week and sent yields on 30-year Treasuries to their highest level since July, creating a steeper yield curve.
Monday’s activity in US interest rates, by contrast, included traders exiting Treasury option trades that targeted higher longer-dated yields and a steeper curve.
“Into tomorrow’s event, markets will continue to lighten up on the profitable Trump trade of October — firmer US dollar and higher yields and a steeper Treasury curve — and de-risk where they can to allow themselves to react in the early morning of Wednesday,” said Jordan Rochester, head of macro strategy in EMEA for Mizuho.
Meanwhile, emerging-market investors had been bracing for the fallout of a potential Trump victory, as his plans to enact tariffs would weaken their exports and demand for their currencies. The Mexican peso, one of the most vulnerable to the threat of tariffs, rose as much as 1.6% against the greenback on Monday. And the onshore yuan gained as much as 0.6%, the most since early August.
The latest polls also impacted betting platforms like PredictIt. On that, a Trump win was seen as around a coin-toss, down from 60% last week.
“Markets are pricing in a higher chance of a Harris win now,” said Carol Kong, a strategist at Commonwealth Bank of Australia. “That means the scope for dollar strength is now higher in the event of a Trump win.”
That said, the US election is far from the only risk that traders must navigate this week.
Traders have been whipped around by changing expectations for interest-rate cuts by the Federal Reserve, with markets seeing a roughly 8% chance that the Fed keeps monetary policy steady when it meets Thursday. Just a few weeks ago, traders were debating whether the central bank might again cut rates by a half-point at either its November or December meeting.
Bond markets will also have to contend with a trio of Treasury auctions this week — including a sale of three-year notes Monday and the big quarterly 10-year and 30-year new issues on Tuesday and Wednesday. And yields have already moved significantly higher.
“Part of what we are seeing is just a reversal of the price action that we had on Friday,” Fredrik Repton, a senior portfolio manager at Neuberger Berman said on Bloomberg TV. “It’s not only the US election, there are so many other things going on this week.”
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