(Bloomberg) – With 18 days to go until the U.S. election, the growing odds of Democrats taking control of the White House and Senate are sending volatility gauges for stocks and bonds in opposite directions.
The Cboe volatility index – known as the stock market’s “fear gauge” – has been relatively subdued this month. This is at odds with the equivalent measure of the US Treasury market: the ICE BofA MOVE index has jumped the most since March last week after languishing near record highs.
As bets on price movements take opposite turns, analysts say traders are betting on the same story. With Democratic candidate Joe Biden comfortably ahead of Donald Trump in presidential polls and his party gaining traction in several Senate polls, the current calculation is that a so-called blue wave would trigger another round of economic stimulus – put pressure on Treasury yields. Meanwhile, concern over a contested outcome is easing on indicators of market volatility.
“Markets see the upcoming election and any final say on stimulus as important data on whether this will be a real inflection point for interest rates,” Sameer said Samana, Senior Global Market Strategist at Wells Fargo Investment. “As the odds of a Biden win and a blue wave increase, bond markets are seeing more and more chance of a bigger stimulus.”
Benchmark 10-year Treasury yields hit their highest level since June last week, as Biden’s lead in the polls widened, but have since retreated as stimulus talks appeared to be deadlocked. Yet the five- and ten-year break-even rates – a proxy for inflation expectations and the likelihood of stimulus success – remain near recent highs.
Currency traders were bracing for an election too close to hand, with high implied volatility long after the vote itself. But those fears have eased as Biden’s poll lead has grown, with UBS Group AG noting this week that the election risk premium is at its lowest since March.
Currently, PredictIt’s market for betting on a Democratic sweep – winning the presidency, keeping control of the House, and taking control of the Senate – is rated around 57%.
“In the equity market, what interests investors is a close or contested election,” Mandy Xu of Credit Suisse Group AG said in an interview with Bloomberg Television on Thursday. “As the likelihood of a Democratic sweep increases, that risk premium has come in.”
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