Market's flight to safety is failing to see critical events ahead besides the U.S. election

Market's flight to safety is failing to see critical events ahead besides the U.S. election

Bonds
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.

Source: Bloomberg.

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%.

Source: Bloomberg.

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.

Name10y Sovereign YieldChange 1 dayISIN
UNITED STATES0.79%-9.61US91282CAE12
CANADA0.62%4.98CA135087K379
BRAZIL3.44%-4.39US105756CC23
MEXICO3.13%-8.37US91086QAG38
BRITAIN0.22%-4.61GB00B24FF097
FRANCE-0.36%-1.34FR0013516549
GERMANY-0.63%-1.21DE0001102507
ITALY0.70%-1.97IT0005422891
SPAIN0.08%-1.27ES0000012G34
PORTUGAL0.06%-1.00PTOTELOE0028
NETHERLANDS-0.53%-1.55NL0014555419
SWITZERLAND-0.56%-0.58CH0224397171
GREECE0.84%-3.00GR0124036709

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.