Bonds: US Treasuries gain ahead of election



LONDON (ShareCast) - Yields and basis point (bp) movements of some of the most-watched 10-year bonds this afternoon:

UK: 1.82% (-3.6bp)
US: 1.68% (-3.2bp)
Germany: 1.43% (-2.3bp)
France: 2.21% (-1.5bp)
Spain: 5.763% (+9.1bp)
Italy: 4.99% (+5.1bp)

[NOTE: there are 100bp to a percentage point]

US Treasuries advanced again today ahead of the presidential elections tomorrow, as current President Barack Obama and Republican challenger Mitt Romney go head to head in a battle which has so far been a dead heat.

Brian Edmonds, the head of interest rates at Cantor Fitzgerald told Bloomberg today that bonds would be expected to rise if Obama secures another four years in office, and vice versa.

He said: "If Obama wins it's more favourable for Treasuries [...] Romney would be the candidate who is a little bit more pro- growth. The election is way too close to call at this point. The market also has a very nice bid because there are more problems coming out of Greece."

Rates strategists at JP Morgan have said that an Obama win would temporarily pressure 10-year US bond yields down to 1.65% this week (from 1.68% today), while a Romney win would pressure the borrowing rate up towards 2%.

US bonds also cemented gains today after the a key measure of service-sector activity came in below forecasts. The ISM purchasing managers' index (PMI) for the month of October came in at 54.2, compared with 55.1 for the month before and the consensus estimate of 54.5.

UK gilts also gained today after the country's own disappointing services figures: the UK services PMI fell from 52.2 to 50.6 in October, well below the consensus estimate of 52.0 and the long-run average of 54.9.

"With the rate of expansion significantly below its long-run average the services sector does not seem to have the strength to drive a strong recovery in the economy, in our view," said analyst Blerina Uruci from Barclays Research.

Investors are also looking ahead to the Bank of England's November (Xetra: A0Z24E - news) policy decision later this week.

As market analyst Michael Hewson from CMC Markets explained today, until the third-quarter gross domestic product (GDP) figures were released recently, it was widely thought that Monetary Policy Committee (MPC (KOSDAQ: 050540.KQ - news) ) would increase its asset purchase programme by an extra £50bn to £425bn this month.

He said: "This is now by no means certain given recent comments by members like deputy governor Charlie Bean, as well as Governor Mervyn King himself, questioning the effectiveness of recent QE.

"There has also been growing concern that the policy of QE could well be causing more harm than good especially with respect to rising pension deficits, which are forcing companies to put aside higher provisions, instead of increasing their capital investment in order to boost growth."

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