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The yield on the benchmark two-year Treasury note rose to its highest level since 2008 as U.S. voters flocked to vote in the 2018 midterm elections.
The rate on the two-year hit 2.924 percent, a level not seen by traders since June 25, 2008. The yield on the benchmark 10-year Treasury note higher at 3.231 percent, while the yield on the 30-year Treasury bond slipped to 3.446 percent. Bond yields move inversely to prices.
The vote on Tuesday is being heralded as a referendum on President Donald Trump's agenda, including his landmark tax cuts and large fiscal spending.
Traders are focused on the U.S. midterm elections on Tuesday, which could send ripples throughout the credit markets. The Democrats are expected to resume control of the House while the Republicans are forecast to maintain their marginal majority in the Senate. This outcome is seen as positive for U.S. markets as, historically, equities have made solid gains in a government gridlock scenario.
"My view is that the House is too tight to call as there are more than 40 House seats that are within the margin of error.. That said, I believe the stock and bond markets are leaning towards Democratic-controlled House," Tom di Galoma, head of Treasury trading at Seaport Global Holdings. "Bond yields in my view, would get smoked if the Republicans pull this out in the end."
If the GOP maintains a majority in both chambers, it could buoy stocks in the short term as it raises the possibility of further tax cuts. Meanwhile, a so-called blue sweep could put pressure on stocks as it may result in a reversal of some of the policies passed by Republicans to boost the economy in the near-term.
The relative calm in the U.S. credit market Tuesday comes as the Federal Reserve's policymaking arm prepares to meet later this week. Fed officials, responsible for keeping unemployment low and inflation tame, have gradually increased interest rates under Chair Jerome Powell as they try to prevent the U.S. economy from overheating.
The Federal Open Market Committee will announce its latest adjustment to monetary policy on Thursday. Should the central bank choose to tweak its policy in November, it's likely it will move to increase the rate paid by the Fed for excess reserves, according to Kevin Giddis, head of fixed income capital markets at Raymond James.
"Rates have certainly moved higher as inflation has ticked up. That won't change much after the election, no matter who wins, loses, or gains control, which is why we still think the Fed will act in December," Giddis said in an emailed statement Tuesday.
"Some believe that gridlock, if that turns out to be the case, is good for some equities and bad for other asset classes," he added. "I would think that bonds would rally in price on that result, anticipating that the economy would slow, and that the FOMC would likely back away from their hawkish stance."
Job openings in the U.S. edged lower in September but were ahead of the total number of people looking for work, the Labor Department said Tuesday.
Vacancies edged lower to just over 7 million, according to the Job Openings and Labor Turnover Survey. The JOLTS report gauges the degree of employment vacancy across the country as well as those who have left their positions.
The Treasury Department auctioned $27 billion in 10-year notes at a high yield of 3.209 percent. The bid-to-cover ratio, an indicator of demand, was 2.54. Indirect bidders, which include major central banks, were awarded 73.8 percent. Direct bidders, which includes domestic money managers, bought 1.2 percent.