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Longer-dated U.S. bond yields surge

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Likely Trump win seen widening deficits

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Tariff plans could also increase inflation

(Updates at 4.30 a.m. ET/0930 GMT)

By Rae Wee and Harry Robertson

SINGAPORE/LONDON, Nov 6 (Reuters) - U.S. Treasuries

dropped on Wednesday, sending yields surging, as Donald Trump

stood on the cusp of a second presidency that could usher in tax

cuts and tariff hikes that boost the deficit and inflation.

Republican former president Trump claimed victory in the

2024 presidential contest after Fox News projected that he had

defeated Democrat Kamala Harris in a stunning political comeback

four years after he left the White House.

The benchmark 10-year Treasury yield rose as

much as 18 basis points to 4.471%, its highest since July, as

polls also showed Republicans winning control of the Senate and

a close race for the House of Representatives.

The yield, which moves inversely to the price, was last up

13 bps at 4.422%, on track for its biggest one-day rise in a

month.

Tax cuts would widen budget deficits and increase government

borrowing while tariffs are expected to stoke inflation and

reduce the Federal Reserve's scope to cut interest rates.

"We need to watch what happens to bond yields, and there

could be a tipping point if U.S. bond yields continue to rise,"

said Seema Shah, chief global strategist for Principal Asset

Management.

"The bond vigilantes are out," she said, referring to

investors dumping government debt over worries about higher

borrowing.

The yield on the 30-year Treasury note last

traded 17 bps higher at 4.619%. That was its highest since early

July and set for its biggest one-day rise since June 2022,

hinting at concerns about future borrowing.

Trump was on the verge of victory at 4.30 a.m. ET after

capturing the battleground states of Pennsylvania, North

Carolina and Georgia and holding leads in the other four,

according to Edison Research.

Treasury yields surged once it became clear Trump had

considerably improved on his 2020 election performance against

Joe Biden.

The two-year yield peaked at 4.312%, its highest

since August, and last traded roughly 5 bps higher at 4.249%.

How much of Trump's tax cut plan will make it through

Congress ultimately depends on whether the Republicans achieve a

clean sweep. Close House races could take days to call.

U.S. budget deficits and government debt levels were

projected to surge under either candidate in the election,

according to several estimates, although Harris was expected to

add less debt than Trump.

The Federal Reserve kicks off its two-day monetary policy

meeting on Wednesday and is expected to deliver another

25-basis-point rate cut, though future decisions look less

certain.

Traders have reacted to the election results by trimming

bets on Fed cuts next year, with rates seen staying above 4%

until May 2025.

"I start to worry when yields cross the 4.50% mark," said

Matt Orton, chief market strategist at Raymond James Investment

Management.

"If we don't reverse that upward trend, I would be more

reticent to add too much more risk until we hear from the Fed or

get a little bit more guidance with respect to where terminal

rates might lie."

European bond yields, meanwhile, fell as investors increased

their bets on rate cuts from the European Central Bank, given

Trump's plans for tariffs on China and Europe could hurt the

euro zone economy.

Germany's 2-year bond yield, which is sensitive

to ECB rate expectations, was last down 9 bps at 2.208%.