Credit Markets Overview: Treasuries Tide Turns

In the month since we introduced this feature, a tide has turned in the bond markets. Treasury yields, which on Oct. 23 were at or near their lowest levels of the year, have since tacked higher. For example, the benchmark 10-year Treasury note's yield, which stood at 5.59% on that date, ended yesterday at 5.82%.

Three factors explain the shift:

George W. Bush's lead in the presidential race. Right or wrong, bond market participants believe that a Bush presidency -- which at this points seems likely, if not assured -- will result in smaller federal budget surpluses than an Al Gore presidency, chiefly because Bush has proposed larger tax cuts than Gore. Because the Clinton administration has been using the budget surpluses to finance buybacks of Treasury securities, smaller surpluses mean fewer buybacks. The prospect of a less-rapidly shrinking supply of Treasuries makes them less valuable, causing their prices to fall and yields to rise.

...