By: Gertrude Chavez-Dreyfus

U.S. Treasury yields fell on Tuesday, moving within narrow ranges, as investors awaited U.S. inflation data that could show deceleration for October and ahead of a midterm elections outcome that may shift the current government dynamic.

Data on the U.S. consumer price index (CPI) is due for release on Thursday, with economists forecasting a decline in both the monthly and yearly core numbers to 0.5% and 6.5%, respectively.

“I think the Fed is paying more attention to the month-to-month readings because they’re much more in tune with what’s going on right at this given moment,” said Gregory Faranello, Head of U.S. Rates at AmeriVet Securities in New York. “That said, we expect inflation to remain sticky into 2023 and I think the Fed has been pretty explicit about that.”

Fed funds futures have priced in a 67% chance of a 50 basis-point rate hike in December, and a 33% probability of a 75-basis-point increase.

Investors are also focused on Tuesday’s U.S. midterm elections.

Control of the U.S. Congress is at stake in the midterms, with Republicans favored by polls and betting markets to win control of the House of Representatives and possibly the Senate.

That potential result would lead to a split government with Democratic President Joe Biden in the White House, an outcome seen as broadly favorable to bond markets, analysts said.

“The general feeling here is that Republicans are going to have a good night,” said Stan Shipley, fixed income strategist at Evercore ISI in New York. “That’s good for bonds and means lower yields because you’re going to get a stalemate in Congress and you’re not going to get big initiatives for social programs.”

Investors expect a Republican majority to curtail Biden’s ability to pursue expansive fiscal policy plans. A Republican majority, even just in one chamber, “suggests that once inflation is under control, the onus is going to be on the Federal Reserve to offer stimulus to the economy,” ING analysts said. “This is our base case for aggressive interest rate cuts from the second half of 2023 onwards,” they added.

The yield on 10-year Treasury notes was down 8.6 bps at 4.1276%. U.S. 30-year Treasury yields were down 4.7 bps at 4.2661%.

On the front end of the curve, U.S. two-year yields fell 5.2 bps to 4.6737%. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes remained inverted at -54.60.8 bps. An inversion of this part of the yield curve typically precedes a recession.

The Treasury’s U.S. three-year auction was well-received, with a high yield of 4.605%, lower than the expected rate at the bid deadline, suggesting higher demand. The bid-to-cover ration, another gauge of demand was 2.57, higher than the 2.46 average.

Indirect bidders took 62.2% of supply, which is roughly 4 percentage points higher above the average of the last four months and the third largest takedown so far this year, according to Jefferies in a research note after the auction.