Treasury yields are on the rise, and the recent election could have caused significant volatility in the market. Are you ready to take advantage of the current landscape? In this episode, we discuss the factors pushing bond yields higher and where to find the best high-yield investment opportunities right now. Don't miss out!

Today’s episode - Volatile

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📈U.S. Treasury Yield Curve Is Steepening as Election Results Unfold

Long-end U.S. Treasury yields rise, causing the yield curve to steepen as election results unfold, Danske Bank Research’s August Hyldgaard says in a note. Results so far suggest the likelihood of Republican Donald Trump’s presidential win, but results are yet to be published in some key swing states. “The U.S. curve is steepening from the long end,” the analyst says.

Recent developments have sparked widespread discussion as the financial world keeps a keen eye on the U.S. Treasury market. Medium- and long-term Treasury yields continue to rise, despite unfavorable job reports and a landscape of economic uncertainty. With these movements, investors face a crucial question: what lies ahead? Here’s a breakdown of recent trends in Treasury yields, factors driving these shifts, potential impacts of the upcoming U.S. elections, and an outlook on alternative high-yield opportunities for those navigating the current fixed-income market.

Treasury Yields Hit New Highs

This past week saw Treasury yields reaching new peaks. The ten-year Treasury note achieved a four-month high, with the twenty- and thirty-year yields surging by ten basis points in a single day. These rises reflect a market buoyed by recent indications from the Federal Reserve about a slower pace for potential rate cuts and a gradually solidifying expectation of a "soft landing" for the economy. In this scenario, growth slows without tipping into a recession. The context of the approaching U.S. elections also adds a layer of volatility as uncertainty looms over the potential outcomes and subsequent market reactions.

Short-term yields across various maturities show a notable divergence. The yield on the ten-year note, a widely observed benchmark, stands out due to its recent peak. Similarly, the Treasury yield curve, which illustrates the yields across maturities, has been gradually un-inverting. This means shorter-term yields are declining while longer-term yields are rising, signaling renewed optimism for long-term stability and confidence in a potential soft landing.

Election Outcomes and Market Implications

The U.S. election has significant implications for financial markets, particularly in the Treasury sector. While elections generally do not have long-term effects on markets, they can create notable short-term impacts. Currently, Trump's victory is viewed as more favorable for the market, as it is associated with a business-oriented administration that could reduce recession risks and support current Treasury yield levels. Conversely, experts suggest that a win by Kamala Harris could lead to a rapid decline in yields. This drop would be a result of decreased uncertainty and an increased likelihood of faster rate cuts by the Federal Reserve, due to concerns about recession risks under a different policy approach.

According to Michael Schumacher, the global head of macro strategy at Wells Fargo, the bond market's current pricing indicates what some analysts term the "Trump trade," a scenario under which markets anticipate Trump’s business-friendly policies to reduce recession odds. His approach aligns with investor sentiment that expects stable or rising yields under his administration. However, should Harris secure the election, bond yields could decrease as quickly as the uncertainty premium dissolves, leading to potential rate cuts as recessionary concerns resurface.

A Bloomberg survey of 350 market participants underscored this dynamic, showing that almost 40% expect the S&P 500 to rise with a Trump victory, whereas fewer foresee similar growth under a Harris presidency. Thus, the Treasury market remains closely linked to these potential election outcomes. Investors wary of these fluctuations may adopt strategies such as dollar-cost averaging, which spreads investment risk across various price points. Alternatively, those seeking optimal yield timing might wait for post-election stability before committing to large purchases in the Treasury market.

Weekly Yield Changes and the Yield Curve

Analyzing Treasury yields on a week-over-week basis provides insight into recent changes in investor sentiment. This past Friday, Treasury yields showed a distinct pattern compared to the prior week. Yields were rising across the board for maturities two years and longer, with the five- and seven-year notes experiencing the most pronounced increases at fifteen basis points each. On the shorter end, yields on one-year and shorter maturities declined, most notably in the one- and four-month bills. This divergence highlights investors’ preference for longer-term debt instruments as confidence grows around a soft landing for the economy.

A broader year-to-date perspective reveals that yields on all Treasury maturities up to two years remain lower than their levels at the start of the year, although the gaps are narrowing. Meanwhile, yields on two- and three-year notes now exceed their January 2024 levels, joining longer-dated Treasuries in a yield climb. This trend has steepened the yield curve further, reducing the disparity between one-month and thirty-year yields to just eighteen basis points—a significant change from earlier in the year.

Given these developments, questions arise about when the yield curve might fully un-invert, meaning when short-term yields will consistently pay less than long-term yields. The un-inversion point could come sooner if market sentiment stabilizes, as post-election certainty may provide the necessary momentum for a sustained soft landing and realignment of short—and long-term rates.

Upcoming Treasury Auctions: What to Watch For

Investors should also pay attention to upcoming Treasury auctions as they assess the current state of Treasury yields. This week, the U.S. Department of the Treasury will auction three-, ten-, and thirty-year notes. These auctions offer insight into investor appetite and yield expectations for new issuances. For each auction, the yield coupon will be determined based on market conditions, and investors can expect some variation in the final yield based on real-time auction dynamics.

For investors exploring these new issuances, platforms like Fidelity provide updated yield forecasts in advance, allowing investors to anticipate potential returns on different maturity dates. With long-term bonds experiencing steady yield increases, these auctions may reflect rising demand for longer maturities, given the market’s continued lean toward stability in the soft landing scenario.

High-Yield Opportunities: Agencies, Corporates, and Brokered CDs

For income-focused investors looking beyond Treasury bonds, alternative fixed-income opportunities abound in the current high-yield environment. Agency bonds, corporate bonds, and brokered Certificates of Deposit (CDs) now offer some of the most competitive yields in recent years.

In agency bonds, FHLB offers a notable yield of 5.75% with a first call date in February 2025, making it an appealing option for yield seekers. Corporate bonds also feature attractive rates, with Deutsche Bank’s new issue yielding as high as 6.05%, featuring a first call date in November 2025. These higher yields reflect a more risk-laden asset class but offer investors a pathway to potentially greater returns than Treasuries alone.

For those seeking more predictable returns, brokered CDs have gained appeal. With special CD rates from institutions like Capital One offering around 4.5% on an eleven-month term, these instruments provide security for investors with a low-risk tolerance, serving as an alternative to Treasury bills and other short-term instruments. While lower than corporate bonds, these CD rates remain attractive in the current low-rate environment and present a viable option for conservative income-focused investors.

A Dynamic Fixed-Income Landscape for Investors

The U.S. Treasury yield landscape has rarely been as dynamic as it is today, with market forces, election uncertainties, and economic expectations all shaping the fixed-income investment environment. As investors navigate this intricate landscape, careful planning and consideration of individual financial goals remain essential. Long-term and income-focused investors may diversify across Treasuries, corporate bonds, and CDs to strike the ideal balance of yield and security in their portfolios.

Market observers and financial strategists will be closely watching the results of upcoming Treasury auctions, potential shifts in the yield curve, and the influence of election results. For investors, staying informed and adaptable is crucial in making the most of the current opportunities while managing potential risks in this evolving market. As the election approaches and bond markets remain volatile, investors may want to remain vigilant, watching for potential windows to secure favorable yields in an otherwise unpredictable economic landscape.

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