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Bush victory is the bet in U.S. Treasury market

NEW YORK (Reuters) - Want to know who will win the U.S. presidential election on Tuesday? Well, the U.S. Treasury market is wagering that Texas Governor George W. Bush will prevail and they are putting their money where their mouth is.

Investors are selling longer-dated Treasury securities, pushing up interest rates, and buying shorter-dated issues, betting that the Republican contender's plans to cut taxes and allow some social security money to be invested in the stock market would rob the government of money to pay down America's $3.4 trillion publicly traded debt.

"The market is acting like it is pricing in a Bush win," said John Roberts, head trader at Barclays Capital.

Investors say Democratic contender Al Gore's plans focus more on debt reduction, which bond markets favor, than Bush's proposals. The vice president says he would use budget surpluses to pay down the debt pile by 2012.

Gore favors around $500 billion in tax relief targeted at low and middle income groups, while Bush favors some $1.3 trillion in tax cuts over 10 years and privatizing part of social security, which may stymie further debt paydown.

Thirty-year bond yields, which move in the opposite direction to prices, have risen five basis points, or 0.05 percentage points, in the last week as Bush strengthens his showing in the polls. Two-year note yields have fallen by a similar margin.

"It's the combination of tax cuts and money flowing out of social security into private investment, which would mean the surplus could disappear faster under Bush than under Gore, which is bad for longer-dated instruments," Roberts said.

Wall Street investment banks have calculated the two differing economic models could differ by as much as $800 billion in terms of debt paydowns.

Further, although budget surpluses are forecast by the nonpartisan Congressional Budget Office to total some $4.6 trillion over the next decade, this estimate does not take into account the presidential contenders' spending promises and relies on economic growth remaining sturdy.

Bush has a three percentage point lead over Gore according to Wednesday's Reuters/MSNBC national daily tracking poll.

Bonds fall from favor?

Earlier this year, 30-year bonds topped investors' shopping lists as fattening budget surpluses led the U.S. Treasury to announce a stream of buybacks of its more expensive, older bonds as well as a sharp cutback in new issues. Issuance is down by around a quarter this year.

As the government turned from being an issuer to a buyer of its debt, prices of longer-dated debt -- the focus of the program -- were squeezed sharply higher, causing yields to sink well below the level of shorter-term securities.

But longer-term debt has been reined back as concern surfaced that election promises by presidential hopefuls, especially Bush, could curtail debt reduction.

"We have taken off some of our bets ahead of the election ... and I think a lot of people are doing that," said Mitch Stapley, chief fixed income officer at Kent Funds in Grand Rapids, Mich.

"Even though tax cuts could be a slow process, the debt is unlikely to be paid down so fast (under Bush), buybacks could slow down and that impacts the longer end of the curve," he said, referring to the yields on longer-term Treasury debt.

Even if slower economic growth tempered Bush's plans to enact his tax cuts, a slowdown would also slash the government's tax haul, crimping the budget surplus which would hamper debt reduction, he added.

Barbells and pork barrels

The move to price in a Bush win has seen many Treasury investors unwind so-called "barbell" strategies put on last month against a background of rising Middle East tensions and whipsawing stock markets.

The barbell strategy aimed to profit from uncertainty, weighting investors' portfolios to the shorter-dated and longer-dated ends of the Treasury maturity spectrum, with few holdings in intermediate securities.

Now longer-dated issues are being dumped in favor of yet more short-dated securities.

"What's happened is there's been a Bush trade where stocks have done well and we have seen some asset allocation out of (30-year) bonds," said Drew Forbes, trader at Daiwa Securities America.

Ideal scenario

Bill Gross, managing director of Pacific Investment Management Co., which manages $250 billion in bonds assets, told Reuters Television that divided government -- with the executive and legislative branches in the hands of different political parties -- would be the bond market's clear choice, as that would ensure neither candidate's tax or spending plans could be fully enacted.

"Both Gore and Bush are going to reduce the surplus. One will send it back to the private sector, one will keep it within the public sector," Gross said.

"The key is to look toward either a split or unified Congress and executive. If we get all of the same party, then I think there's more danger for the fixed income markets."

History seems to back this up.

Over the last two decades, 30-year bond yields have ended lower than they started in every four-year presidential term. Only for two years -- between 1993-1995 -- were the White House and Congress run by the same party -- the Democrats -- and yields rose over those years.

Copyright 2000 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


Thursday, November 2, 2000


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