US yields drop as uncertainty eases with election outcome known
Focus on Fed decision: likely a 25-bp cut
Investors buy back Treasuries after selloff
US data shows economy still resilient
Recasts, adds analyst comment, bullets, byline, NEW YORK dateline, updates prices
By Gertrude Chavez-Dreyfuss and Rae Wee
NEW YORK/SINGAPORE, Nov 7 (Reuters) -U.S. Treasury yields fellon Thursday, after hitting multi-month highs the previous session, as investors paused selling government debt and squared up positions to take advantage of lower prices to get back into the market.
U.S. yields rise when bond prices fall.
The market is also looking ahead to the Federal Reserve's likely decision to cut interest rates by 25 basis points (bps) at the end of its two-day meeting later on Thursday.
Market players alsoreflected on Republican former President DonaldTrump's victory in the U.S. presidential race that has fuelled worries of higher fiscal deficits under an economic plan that would stoke inflation through tariffs and entail increased issuance of Treasuries to help address the budget shortfall.
Republicans also woncontrol of the U.S. Senate. Investors are stillawaiting results in the House of Representatives, and Republican control would clear the path for Trump's agenda.
"The event (U.S. election) has passed and now we have a pretty clear picture of the outcome. And we had said yesterday that yields were near a peak in our view," said Angelo Manolatos, macro strategist, at Wells Fargo.
"So we're starting to think of adding more intermediate tenors, around the five-year part of the curve. We had seen a large selloff (in Treasuries), with market participants on the sidelines waiting for the election outcome. That has created opportunities."
In midmorning trading, thebenchmark 10-year Treasury yield US10YT=RR slid 6.7 bps to 4.359%, retreating from a roughlyfour-month peak hit in the previous session on the back of a heavy selloff in bonds following Trump's victory.
U.S. 30-year bond yields US30YT=RR dipped 4.2 bps to 4.559%, moving away from a nearly six-month peak hit on Wednesday.
The U.S. two-year yield US2YT=RR, which reflects interest rates expectations, was down 5.8 bps at4.209%, not that far fromWednesday's three-month high of 4.312%.
The U.S. yield curve flattened a bit on Thursday, as yields came off their highs. The gap between two-year and 10-year yields was at 15.1 bps US2US10=TWEB, falling after hitting on Wednesday its steepest level since late September of 19.5 bps.
"At some point, higher yields could begin to act as a headwind on equity prices, especially if they threaten to rise back to the highest levels seen last year, said Saxo's chief macro strategist John Hardy.
"Further, how will the (Fed) behave now that the U.S. election outcome is known? Any inflationary resurgence will remove further policy easing expectations."
With a Fed cut underway on Thursday,the rate futures market hassince pared back bets on the scale of future monetary easing by the U.S. central bank. Money markets now see the Fed cutting its policy rate only twice in 2025, lowering it to the 3.75%-4% range and likely taking until July to do so. FEDWATCH
"Given our view that the neutral rate lies around 3.50%, Trump's return to the White House likely means that the Fed needs to keep rates above this level," said George Brown, senior U.S. economist at Schroders.
U.S. data on Thursday continued to show an economy that is not doing too badly. Initial claims for state unemployment benefitsincreased 3,000 to a seasonally adjusted 221,000 for the week ended Nov. 2, data showed.
In the meantime, U.S. labor costs - the price of labor per single unit of output - rose at a 1.9% rate in the July-September quarter after an upwardly revised 2.4% pace of expansion in the second quarter. That has partly dimmed the outlook for inflation and interest rates.
Treasury yields did trim losses after the economic reports.
Reporting by Gertrude Chavez-Dreyfuss in New York and Rae Wee in Singapore; Editing by Shri Navaratnam and Sharon Singleton
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