By William L. Watts, MarketWatch
FRANKFURT (MarketWatch)—U.S. Treasury prices posted strong gains Wednesday after President Barack Obama won reelection over Republican challenger Mitt Romney, putting the focus on the looming fiscal cliff as pressure increased on political leaders to reach a compromise before the automatic round of massive spending cuts and tax hikes takes effect on Jan. 1.
The yield on the benchmark 10-year U.S. Treasury note 10_YEAR -6.26% fell more than 10 basis points to 1.646%, according to FactSet. Yields fall as bond prices rise. A basis point is 1/100th percentage point.
The yield on the 30-year bond 30_YEAR -3.04% fell 9 basis points to 2.83%, while the two-year-note yield 2_YEAR -12.62% fell 4 basis points to 0.26%.
The move, which came on high volume, “is a function of anticipation that 1) the fiscal-cliff risk is closer, 2) the chance for higher taxes is higher, 3) the Bernanke Fed is secure, and 4) in order to get anything done, Obama will have to agree to spending cuts for his revenue hopes and the deficit by hook or crook will come down faster than under a Romney regime,” wrote strategists at CRT Capital Group.
Cliffhanger
The fiscal cliff refers to around $600 billion in automatic, across-the-board spending cuts and tax hikes that would take place on Jan. 1 unless politicians agree to a budget compromise beforehand. The massive fiscal tightening would threaten to send the U.S. back into recession, economists said.
Obama defeated Romney in a hard-fought campaign, while Republicans maintained control of the House and Democrats retained the Senate.
The rally by Treasurys may in part reflect ideas that House Republicans may be emboldened by Obama’s narrow victory to take an obstructionist stance, wrote strategists at Royal Bank of Scotland.
Obama’s victory also underscores impressions that the Fed will maintain a loose policy stance, they said, removing the possibility that a Republican-appointed Fed chairman could replace Ben Bernanke in 2014 “and [turn] the spigot off too early,” they wrote.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
