Investors pile into US Treasuries after early election results show there has been no 'Blue Wave' and the chances for a big stimulus deal fade

• Investors pile into longer-dated US Treasuries, pushing yields to their lowest in weeks, as the chances rise for a contested presidential election.
• Demand for Treasuries led by decreased expectations of stimulus in the absence of a "Blue Wave" win by the Democrat party.
• "That makes either presidential outcome a disappointment for those expecting the huge fiscal stimulus a 'Blue Sweep' was expected to bring," James Athey, a portfolio manager at Aberdeen Standard Investments said.

The US Treasury market staged its biggest rally in months on Wednesday, after the initial results from the presidential election showed there had been no sweeping "Blue Wave" win for the Democrats, which sent investors piling into the comparative safety of longer-dated bonds.

The presidential election saw huge voter turnout, but looks like it has come down to just eight states and by early Wednesday morning, it appeared that either President Donald Trump, or Democrat opponent Joe Biden could win.

This is despite national polls showing Biden maintaining a comfortable lead over Trump in the run-up to the vote.

Yields on the 10-year note fell as much as 14 basis points at one point overnight to as low as 0.815%, in their biggest daily drop since at least June, while yields on 30-year bonds dropped by as much as 17 basis points to around 1.515%, bringing the gap between the two instruments to its narrowest in well over a month.

This narrowing usually reflects a belief among investors that the economic outlook is more uncertain and that expectations for inflation may be declining too.

"Obviously, the result is still very much up in the air but it very much looks like the Dems have failed to flip the senate. That makes either presidential outcome a disappointment for those expecting the huge fiscal stimulus a 'Blue Sweep' was expected to bring. That means lower Treasury yields and a flatter yield curve," said James Athey, a portfolio manager at Aberdeen Standard Investments.

Athey betted against a comfortable Biden win, according to Bloomberg.

"Throw in the likely delays and fractious legal challenges and it's not a good environment for risk assets which should also drive a flight to quality into treasuries pushing yields down and the curve flatter," he added.

Trump said in a press conference overnight he would ask the Supreme Court to stop counting votes and declared that he had won the election, despite a substantial number of votes still left to count in key battleground states, such as Arizona, Georgia, Michigan, Nevada, Pennsylvania, and Wisconsin.

With this increasingly contested election, "the worst outcome now would be a delayed result with a Biden win - that brings the potential for draconian COVID lockdowns and a disappointing fiscal response as the fiscally conservative senate republicans run interference," Athey argues.

If Biden doesn't manage to secure control of the Senate, even winning the White House won't guarantee that the government can approve a bigger economic stimulus package. This "means less growth and less issuance – both of which are supportive for bonds at the long-end of the curve," said Kiran Ganesh, Multi-Asset Strategist at UBS Global Wealth Management.

Without a stimulus deal, yields on 30-year Treasuries could continue to fall, he said.

"If Congress finds it difficult to pass new stimulus, or it is much reduced, we could re-approach those (August) lows even if we don't re-test them," he said.