US Treasury yields fell on Monday as traders stepped back into the bond market following last week's sell-off to reduce their bearish positions and hedge against any surprises in the US congressional elections on Tuesday. "The general feeling is not to go with very extreme positions before the elections," said Tom Simons, senior money market economist at Jefferies LLC in New York. "The view is that the outcome could result in a shift in the direction of government policies."
Tuesday's elections will determine whether Democrats wrest one or both of the two chambers of Congress from Republicans. If Democrats win control of the House of Representatives, as many polls are indicating, analysts anticipate further gridlock that will not yield any fiscal legislation, such as the massive tax cuts enacted last December. The latest polls showed Republicans will likely retain their majority in the Senate.
Investors also await clues about the Federal Reserve's view on future interest rate increases when policymakers meet on Wednesday and Thursday. On moderate trading volume, the yield on benchmark 10-year Treasury notes was more than 1 basis point lower at 3.201 percent. The 30-year bond yield fell 2 basis points to 3.434 percent after on Friday touching 3.464 percent, which was the highest since July 2014.
The two-year yield was little changed at 2.912 percent, within striking distance of 2.920 percent on Friday, a level not seen June 2008. The Treasury sold $37 billion of three-year notes, the first leg of the government's quarterly refunding that is expected to raise $28.7 billion in new cash to fund the federal deficit.
Overall demand was soft with direct bidders, which include bond dealers and select institutional investors, buying 3 percent of the latest three-year supply, which was their smallest share in nearly nine years. The ominous start to the refunding raised caution about bidding for the record amounts of 10-year and 30-year offerings for sale this week.
Declining purchases from overseas central banks, together with rising hedging costs, are risks for the longer-dated auctions.
On the other hand, data suggested speculators pared their bearish bets on 10-year Treasuries last week, while asset managers built record bullish positions in 10-year T-note futures, Commodity Futures Trading Commission data released late on Friday showed.
"My feeling is that direct bidders will evaporate," Simons said of possible results at the longer-dated auctions.
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