News: NAB TREASURIES-U.S. yields edge down ahead of CPI, elections outcome

U.S. Treasury yields edged lower in London trade on Tuesday as investors await the outcome of the midterm elections that will determine control of Congress.

Markets will also closely watch consumer price data for October, due on Thursday, for indications about the Federal Reserve's future monetary policy path.

Last week a strong U.S. jobs report for October supported the view that the central bank will be in no rush to slow down its aggressive tightening, triggering a bond selloff.

Republicans have gained momentum in polls, with analysts forecasting a split government in which Republicans win control of the House of Representatives and possibly the Senate.

However, markets may need to suspend their judgement for a few days after the election until the full results are known.

"Precedent suggests declaring the final results will take time (and court cases)," said Paul Donovan, Chief Economist at UBS Global Wealth Management.

Investors expect a Republican majority to curtail president Joe Biden's ability to pursue expansive fiscal policy plans.

A Republican majority, even just in one house of Parliament, "suggests that once inflation is under control, the onus is going to be on the Federal Reserve to offer stimulus to the economy", ING analysts said.

"This is our base case for aggressive interest rate cuts from the second half of 2023 onwards," they added.

The yield on 10-year Treasury notes US10YT=RR was down 1.5 basis point (bps) at 4.20%.

"A divided government outcome with political gridlock for the next two years should come as no surprise, so the impact on markets should be modest," Philip Marey, U.S. strategist at Rabobank, said.

However, an unexpected victory for the Democrats in the House of Representatives would keep the door open to ambitious left-wing policies that could further fuel inflation, with a positive effect on interest rates, Marey said.

U.S. 30-year Treasury yields US30YT=RR were flat at 4.31%. A closely-watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR remained inverted at -50.8 bps.

An inversion of this part of the curve typically foreshadows a U.S. recession.