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Treasuries declined with the safest sovereign bonds worldwide after the Federal Bureau of Investigation reaffirmed that Democratic candidate Hillary Clinton didn't commit a crime in handling her e-mails as secretary of state, sapping demand for havens with the presidential election just a day away.
Treasury two-year note yields rose for the first time in seven days amid speculation that a Clinton win is more likely, which strategists say would boost the probability of a Federal Reserve interest-rate increase next month. Futures contracts show an 82 percent likelihood of a hike by year-end, compared with 76 percent at the end of last week. Yields on German 10-year bunds and U.K. gilts also rose.
All eyes are on the U.S. as Americans vote for Barack Obama's successor on Tuesday. For bond traders, the impact on the Fed's monetary policy is the most immediate ramification. TD Securities (USA) said last week that the odds of a December rate hike could fall to 20 percent or lower if Republican nominee Donald Trump wins. Clinton is seen as a continuity candidate, while Trump, a political novice who has advocated winding back free-trade agreements, is viewed as more unpredictable.
"For the Fed, as much as they want to stay out of politics, they're reading the tea leaves to see what happens," said Michael Franzese, New York-based head of fixed-income trading at MCAP, a broker-dealer. "You would assume if Clinton gets in, it's status quo around the globe. It's definitely two visions."
Treasury 10-year note yields climbed five basis points, or 0.05 percentage point, to 1.83 percent as of 1:07 p.m. in New York, set for the biggest one-day increase since Oct. 27, according to Bloomberg Bond Trader data. The 1.5 percent security due in August 2026 dropped 14/32, or $4.38 per $1,000 face amount, to 97 2/32.
Yields on two-year Treasury notes, which are more influenced by the outlook for Fed policy than longer maturities, climbed four basis points to 0.82 percent, after falling 10 basis points in the previous six days as opinion polls showed the election tightening.
In Europe, the yield on German 10-year bunds climbed about one basis point to 0.15 percent, while and that on similar-maturity Spanish bonds slid two basis points to 1.24 percent. Yields on 10-year U.K. gilts rose five basis points to 1.17 percent.
Treasury 10-year yields fell seven basis points last week after the FBI's James Comey told Congress on Oct. 28 that the organization was examining new e-mails potentially related to its investigation of Clinton's use of a private computer server. That revelation breathed new life to Trump's campaign and roiled markets, sparking demand for haven assets.
Since then, "the FBI investigative team has been working around the clock to process and review" the material, Comey said in a second letter to members of Congress, dated Sunday. The letter was released by Representative Adam Schiff, a California Democrat. Bond investors joined traders in currency and stock markets in shifting toward riskier assets Monday.
A Labor Department report on Friday showed U.S. wage growth accelerated in October, supporting a view the central bank will raise rates by year-end.
"Investors are beginning to accept that the Fed really does want to hike in December and that it's going to take a fairly big shock between now and mid-December for them to change their mind," Ethan Harris, head of global economics at Bank of America's Merrill Lynch unit, said in an interview on Bloomberg Television. "In the context of all the focus on the election, you've quietly had the Fed basically signaling that December is extremely likely."