(Adds graphic, analyst quote in 5th and 14th paragraphs 30-year yield in 11th paragraph)
TOKYO, Nov 4 (Reuters) - Longer-dated U.S. Treasury yields retreated from five-month highs on Wednesday after President Donald Trump led Democrat challenger Joe Biden in several election battleground states, increasing worries about drawn out political uncertainty.
The benchmark 10-year yield initially jumped to a five-month high of 0.9450% at the beginning of Asian trading but then fell to 0.816% as U.S. election results came in.
That pushed Treasury futures prices off a five-month low, up 18 ticks to 138-21.
Trump looked likely to win in the vital battleground state of Florida late on Tuesday. He also had a lead in other swing states, but counting of mail-in ballots could take days.
“It’s not looking like any sort of blue sweep like anyone was expecting,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale in New York, referring to expectations for the Democrats to take the White House and both chambers of Congress.
“What the bond market is doing pretty much says it all. A massive rally, reversing the selloff we had earlier in the day. As these election results get tighter, it definitely increases the odds of some sort of contested election.”
Since mid-October, U.S. long-term yields have risen rapidly as Biden’s lead over Trump in opinion polls encouraged some investors to price in the chance of big fiscal spending in the case of a Democrat victory.
However, Trump’s lead in hotly contested Florida caused an unwinding of some bets on Biden in the bond market, analysts said.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes narrowed to 65.1 basis points in Asia on Wednesday. That suggests investors expect less fiscal spending as Trump’s prospects for a second term improve.
A Republican government is likely to spend less money on stimulus than a Democratic administration, another factor that has pushed down longer-dated Treasury yields, analysts said.
The 30-year yield also fell from a five-month high to 1.5999% on Wednesday.
Speculators’ net bearish bets on U.S. 30-year Treasury bond futures rose to a record high in the latest week, according to Commodity Futures Trading Commission data released on Friday, highlighting strong expectations in the run-up to the election for a spike in yields.
Other analysts say that regardless of who wins the election, stimulus spending is necessary to prevent a rapid increase in coronavirus infections from wrecking economic growth.
“If the U.S. economy benefits from the next round of stimulus, then yields would rise, the dollar would rise and the yen would fall,” said Yuichi Murao, senior investment officer at Nomura Asset Management.
“That would be positive for Japanese markets. One concern is the U.S. debt burden is high, and it’s a question of who will finance it.”
Recently, new infections have touched record levels in the United States and some analysts worry that a resumption of restrictions on business activity to contain the virus will harm the economy.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell slightly to 0.1565%.
Reporting by Stanley White; Editing by Sam Holmes
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