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Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Market's flight to safety is failing to see critical events ahead besides the U.S. election
Althea Spinozzi
Head of Fixed Income Strategy
Summary: As the U.S. election looks most likely to be contested, the market runs to safety. In the short-term, we could see 10-year Treasury yields falling below 70bps and the 30-year yields sliding to 1.4%. The market is failing to see that besides the U.S. election, other factors can influence the direction of U.S. Treasuries. One of these is the Treasury's bond issuance schedule that is going to be released today, the FOMC meeting tomorrow and job data coming out on Friday.
The bond market is having a change of heart, and it is running to safety as a Biden win is not as clear after all. Investors have to prepare to even lower yields as large short future bond positions will need to be closed, pushing Treasuries even higher. Looking at the 2s10s spread, we see that if the main trendline is broken at 60bps, the spread will find support on the old resistance line at 55bps. If also that support is broken, the spread can tighten as much as 20bps from current levels finding support at 43bps.
Because the move in the 2s10s is concentrated in the 10-year Treasuries, therefore in the most extreme risk-off scenario we might see the 10-year yields falling below 70bps.
Still, we might see the most significant move in the 30-year Treasury yields as once they break their trendline at 1.54% they will find support at 1.40%.
The wild card out there, however, is the U.S. Treasury that today will announce its bond issuance schedule for the quarter. If the Treasury is looking to increase the bond issuance volume, the market will need to rethink about the rally. As the image below shows, the U.S. Treasury has stepped up Bills and Notes issuance; however, long term bond issuance has not yet been expanded. Suppose the Treasury is looking to issue a significantly higher amount of long-term bonds, but the Federal Reserve tomorrow fails to step up the bond purchasing program. In that case, we might quickly see the U.S. yield curve reversing its course and steepening again.
The flight to safety hasn’t pushed only the price of Treasuries higher but has supported prices of European sovereigns too. The Gilts and Greeks 10-year yields have benefitted the most, falling by 3bps and 3.8bps respectively.
| Name | 10y Sovereign Yield | Change 1 day | ISIN |
| UNITED STATES | 0.79% | -9.61 | US91282CAE12 |
| CANADA | 0.62% | 4.98 | CA135087K379 |
| BRAZIL | 3.44% | -4.39 | US105756CC23 |
| MEXICO | 3.13% | -8.37 | US91086QAG38 |
| BRITAIN | 0.22% | -4.61 | GB00B24FF097 |
| FRANCE | -0.36% | -1.34 | FR0013516549 |
| GERMANY | -0.63% | -1.21 | DE0001102507 |
| ITALY | 0.70% | -1.97 | IT0005422891 |
| SPAIN | 0.08% | -1.27 | ES0000012G34 |
| PORTUGAL | 0.06% | -1.00 | PTOTELOE0028 |
| NETHERLANDS | -0.53% | -1.55 | NL0014555419 |
| SWITZERLAND | -0.56% | -0.58 | CH0224397171 |
| GREECE | 0.84% | -3.00 | GR0124036709 |
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