Bond Report: 2-year Treasury yield pulls back from 15-year high as traders see gridlock ahead in Washington


Most Treasury yields were lower on Tuesday as investors awaited the results of a U.S. midterm election that will determine control of Congress and could affect federal spending plans.

What yields are doing

The yield on the 2-year Treasury note

fell to 4.693% from 4.726% on Monday. Monday’s level was the highest since July 25, 2007, based on 3 p.m. figures from Dow Jones Market Data.

The 10-year Treasury note

yielded 4.145%, down from 4.212% Monday afternoon.

The 30-year bond yield

was 4.256%, down from 4.312% late Monday.

Market drivers

Polls and betting markets indicate Republicans are likely to take control of the U.S. House and have a strong shot at flipping the Senate from the Democrats in the midterm elections. Republican control of one or both chambers would likely lead to gridlock on the legislative front, stymieing the potential for increased fiscal spending, analysts said.

Related: The stock market could pop higher after midterms: Morgan Stanley’s Mike Wilson

Investors have also remained focused on monetary policy. Last week, Federal Reserve Chairman Jerome Powell indicated that interest rates would need to move higher than officials previously expected as the central bank struggles to rein in stubborn inflation. It remains unclear just how high rates will ultimately rise.

Still on tap for later this week is Thursday’s release of the October consumer-price index.

What analysts say

“While each election holds its own level of importance, today’s ballot seems to hold particular significance as the outcome will determine the directional momentum of the economy for some time as the Federal Reserve struggles to slow demand in order to rein in inflation,” said Lindsey Piegza and Lauren Henderson of Stifel Nicolaus & Co.

“A shift in power towards Democrats is likely to result in further expansionary fiscalpolicy, while a power pendulum swing to the right is likely to result in gridlock,” they wrote in a note.

The Tell: Own a muni ETF? Here’s what midterm elections mean for the municipal bond market, according to this investment team

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