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A key bond-market signal suggests how investors could cope with the volatility and uncertainty of this remarkable US election year, Lisa Shalett from Morgan Stanley reports.


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Key quotes

“Generally, low long-term rates this close to an election typically point to a status quo result or divided government. However, the US stock market (along with polling data), seems to be telegraphing increasing odds of Democrats gaining control of the White House and both chambers of Congress, which would raise the odds of substantive policy reforms.”

“Market volatility may depend mainly on how long before the November election outcome becomes clear. The margin of victory will dictate the timing of final results and for how long. A margin of victory of less than 3% could delay final results by as much as several weeks.”

“I expect the yield curve, an economic indicator based on the bond market, to steepen post-election, as long-term rates rise while short-term rates stay anchored by Federal Reserve policy. I believe that will happen regardless of who gets voted into office.”

“Clarity on the election, ongoing economic growth, passage of a fiscal stimulus bill (which we still see as likely next year) and distribution of a vaccine could all be catalysts for rising long-term rates.”