A victory by Obama in next month’s vote with neither party controlling both houses of Congress may increase concern that the so-called fiscal cliff will slow growth, Priya Misra, Shyam Rajan, Bank of America strategists in New York, wrote in the report Oct. 26.
The fiscal cliff refers to $607 billion in federal spending cuts and tax increases scheduled to take effect in January unless the U.S. Congress acts.
This outcome will lead investors to favor longer maturities because it threatens the economy, according to Bank of America, one of the 21 primary dealers that trade directly with the Fed.
A victory by challenger Mitt Romney may lead to questions about a change in central bank leadership and policy. This should push yields higher, led by mid-term rates, according to the report.
Yields on the shortest maturities are anchored by the Fed’s view that it will need to keep its target for overnight bank lending close to zero at least through the middle of 2015.
Romney has said he won’t reappoint Fed Chairman Ben S. Bernanke, who has tried to put downward pressure on yields by buying Treasury and mortgage debt.