A guide into Treasuries as we are approaching the US election

At present, long term yields are the biggest movers of the US yield curve. Thus, movements in 30-year yields are critical to understanding the yield curve direction.

Below you find a candle chart of the 30-year Treasury yield since the beginning of the year until today. As you can see, the 30-year yield broke above what it used to be its resistance line. The new support line has already been tested twice. As the election approaches and we experience more volatility in the equity market, it will most likely be tested again. If risk-off sentiment pushes yields below the support line, the 30-year yields will find support at 1.42%.

Even though we can see a slight flattening of the yield curve in the short term, in the long-term, some elements point to the fact that only a steepening of the yield curve is possible.

As the graph below shows, sentiment over US Treasuries has deteriorated since the beginning of the year until today. However,  Treasury yields didn't rise because of recent risk-off trading dynamics. We expect this to change as reflation becomes a more threatening factor after the US election, especially if Biden wins.

Investors are increasing their short positions in US Treasury futures as reflation becomes a real threat. 30-year Treasuries are falling faster compared to 10-year Treasuries because the Federal Reserve accommodative monetary policies control the front part of the yield curve. Suppose the Fed doesn't want Treasury yields to rising fast after the elections. In that case, it may need to expand its bond purchasing programme to longer-term maturities.