US yields subdued after Biden drops reelection bid

NEW YORK – US Treasury yields inched higher on Monday, as markets assessed the uncertainty surrounding the race for the White House after President Joe Biden dropped his bid for reelection.

Vice President Kamala Harris was moving swiftly to try to lock up the Democratic presidential nomination and secured the support of former House Speaker Nancy Pelosi, while nearly all of the prominent Democrats who had been seen as potential challengers to Harris have lined up behind her.

“That’s been the big question mark hanging over the markets; a lot of people in the Treasury market were working towards that understanding that Biden was going to drop out. I’m not terribly surprised there’s not some kind of huge upheaval in the rate structure and term structure,” said Thomas Urano, co-chief investment officer at Sage Advisory in Austin, Texas.

“More importantly, the Fed’s playing a pretty clear role here because we’ve had a solid view of inflation moving in their direction, growth kind of decelerating, so the door’s open for the Fed to make some adjustments in the near future so that’s the other thing that’s really got the Treasury market’s attention.”

Yields have dropped in July as data showed signs of a slowing labor market and easing inflation to bolster expectations the central bank will cut interest rates this year.

The yield on the benchmark US 10-year Treasury note rose 2.1 basis points to 4.26%.

The yield on the 30-year bond advanced 2.9 basis points to 4.479%.

The Federal Reserve is scheduled to hold its next policy meeting at the end of July, with markets pricing in only a slight chance for a cut of at least 25 basis points (bps), while largely expecting the central bank to reduce rates at its September meeting, according to CME’s FedWatch Tool.

Investors will eye the report on gross domestic product for the second quarter on Thursday and personal consumption expenditures (PCE) data for June on Friday for clues on the Fed’s interest-rate path.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year notes, seen as an indicator of economic expectations, was at a negative 26.7 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, edged up 1.6 basis points to 4.523%.

More supply will come to the market this week as Treasury auctions USD 69 billion in two-year notes on Tuesday and USD 70 billion in five-year notes on Wednesday.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.192% after closing at 2.197% on July 19.

The 10-year TIPS breakeven rate was last at 2.29%, indicating that the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Kirsten Donovan and Andrea Ricci)