Eric Platt and Colby Smith in New York and Katie Martin in London
Fading expectations of a decisive election win for Joe Biden have boosted bonds and lifted the dollar as a set of trades based on a “blue wave” Democratic sweep of the White House and Congress stumbled.
Investors had ramped up bets in recent days that decisive Democratic victories in line with pre-vote opinion polls would spark another round of stimulus for the US economy.
Mr Biden may still clinch the presidency, but Donald Trump’s victories in Florida and Ohio have undermined investor expectations of a big win for the Democrats. Instead, the Republicans’ strong showing in several battleground states, and seemingly tight grip on the Senate, have prompted money managers to prepare for the prospect that the outcome will remain unclear for days and the US could be left with a divided government, complicating the investment outlook.
“The ‘blue wave’ trade has been going on since the summer and has built up more recently, and I would expect it to unravel now. But beyond that, trading the outcome in this environment makes no sense,” said Fabiana Fedeli, global head of fundamental equities at Robeco.
“Short term, I think we sit it out,” she added, arguing that economic stimulus and the path of the pandemic were much more significant drivers for markets than the outcome of the election alone.
The yield on the 10-year Treasury briefly eclipsed 0.9 per cent on Tuesday evening — hitting the highest level since June — in anticipation that a big Democratic win could fire up government spending, and potentially inflation. In turn, that was expected to place more downward pressure on longer-term bond prices, and send yields rising.
But yields dropped to 0.8 per cent on Wednesday morning, reflecting how some fund managers had been caught out. “Markets need to have a serious look at their systems,” said Didier Saint-Georges, head of portfolio advisers at French investment house Carmignac. “Now we are back to where we were before the ‘blue wave’ trade. We are back to fundamentals.”
The dollar also strengthened alongside the gains in Treasuries, rising 0.3 per cent against the euro and 0.4 per cent against the Japanese yen.