The Weekly Spread: What Shaped US Treasury Yields And The Dollar This Week

• A sweeping Democratic victory in the midterm elections fueled market expectations that future fiscal expansion and federal budget deficits will be tightly constrained.

• A 6.4% plunge in the Nasdaq 100 and a 12% crash in semiconductor shares (SOXX) on Thursday accelerated a rotation out of equities and into fixed income.

• The yield curve, or the spread between 10-year and two-year Treasury yields, inched higher, as two-year yields dropped faster than the benchmark 10-year as traders scaled back wagers on aggressive rate hikes.

U.S. government bonds experienced a powerful multi-day rally so far this week, supported by a mix of political realignment in Washington that led to a sharp risk-off rotation away from tech stocks.

Following a decisive Democratic sweep in the midterm elections, fixed-income investors increasingly priced in a divided government that will likely check executive spending plans and narrow prospective federal deficits.

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The resulting optimism broke months of bearish market sentiment driven by inflation jitters and excessive debt issuance. Yields across all tenors plummeted by at least four to twelve basis points, with the benchmark 10-year Treasury yield sliding to 4.85%.

The benchmark 10-year Treasury yield remained below the 5.00% threshold for the second straight week. The 30-year U.S. Treasury yield remained largely unchanged at 5.31% as on Nov. 5.

The spread between the U.S. 10-year yield and the U.S. 2-year yield ticked marginally higher by 3 basis points to 0.36% in the week.

The iShares 20+ Year Treasury ETF (TLT) is on track to end its fifth straight week higher, while the shorter-duration iShares 1-3 year ETF (SHY) eased slightly so far this week.

Retail sentiment on TLT and SHY was ‘bullish,’ with ‘high’ message volumes.

Yield Curve & Global Sovereign Markets

Buying pressure swept across the entire Treasury yield curve on overwhelming safe-haven demand. Volumes in Treasury futures spiked roughly 40% above 20-day moving averages on Thursday as institutional portfolios scrambled for duration, according to Bloomberg data. The historical tendency for 10-year yields to fall in the month following a congressional power shift reinforced the downward momentum.

However, fixed-income strategists note that while a divided Congress creates legislative blockades that calm immediate bond supply fears, underlying structural deficits and future funding requirements will persist. Meanwhile, the U.S. Treasury Department announced plans to keep quarterly note and bond auction sizes unchanged, offering vital clarity to primary dealers and stabilizing the issuance pipeline.

“The blue wave means the federal government is sure to be divided on most issues… That typically creates a blockade against new legislation…an environment which broad financial markets traditionally view favorably as variables decrease,” Deborah Cunningham at Federated Hermes told Bloomberg.

International sovereign bond markets followed similar trajectories. German 10-year Bund yields and other major sovereign yields mirrored the U.S. decline, reflecting broad-based global demand for safe-haven assets.

Meanwhile, the Dollar Spot Index was flat so far this week against a basket of developed market currencies.

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Shashank Nayar has no position in any of the stocks mentioned in this article. StockTwits’ news team content is for informational purposes only and is not intended as investment advice. For more, see our editorial policy. This article was originally published on StockTwits.

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