The us yield curve has steepened sharply as investors weigh the prospects of a democratic victory in the upcoming us election and the potential of more aggressive fiscal policy.

On tuesday, the yield on five-year treasury notes was at one point 1.27 percentage points below that of 30-year government bonds the widest gap since 2016, save for a brief intraday move in june after investors ditched ultra-long securities at a faster pace than their shorter-term counterparts.

The gap later shrunk to 123bp afterpresident donald trump called off talks with congressional democrats regarding a new relief package, effectively punting the issue until after the november 3 election.

At the high of the day, the yield on 30-year treasuries had risen 0.14 percentage points since the start of the month to 1.6 per cent, while the benchmark 10-year yield was up 0.1 percentage points to 0.78 per cent. they fell to 1.5 per cent and 0.74 per cent, respectively, after the stimulus talks news.

Shorter-dated treasuries have budged less this month, with two-year yields steady at 0.14 per cent and five-year notes slightly lower at 0.31 per cent.

Line chart of difference between five-year and 30-year treasury yields, basis points showing yield curve steepens as investors consider democratic sweep

Investors said the back-up in longer-dated treasury yields in recent days was driven in part by the growing chance that the november 3 election could result in a blue wave whereby the democrats clinch the presidency and both chambers of congress.

A democratic sweep could pave the way for more ambitious relief packages to support the us economic recovery and more treasury securities flooding the market to fund such efforts, they said.

Last week, modelling of poll data by fivethirtyeight showed that democrats had a 61 per cent chance of winning the senate. that has since risen to 66 per cent.

A blue wave means more supply and therefore higher rates, said priya misra, global head of rates strategy at td securities. people realise that the democrats are more in favour of bigger fiscal stimulus.kathy jones, chief fixed-income strategist at charles schwab, added: it will be much easier to get fiscal stimulus through if there is a majority in both the senate and the house and the presidency for democrats.

Federal reserve policy has also played a critical role in the steepening of the yield curve, strategists said. the us central bank is currently buying $80bn of treasury securities per month, across a range of maturities.

Investors have called on the fed to tilt its purchases to longer-dated notes, given that the treasury has ramped up issuance of this kind of debt. without a firm commitment to do so, investors warn long-term bond yields will continue to feel upward pressure.

What happens to the 10-year is dependent on what the fed does, said ms misra. they are the marginal buyer.

Jay powell, the federal chair, has told us policymakers that providing too little support for the american economy would be far more dangerous than offering excessive help. in an appearance on tuesday, he stepped up his calls for a new stimulus package, saying the economic recovery from the damage inflicted by the coronavirus was far from complete.

Ms jones said the recent steepening of the yield curve also reflected improving expectations for the us economy especially if more robust government support does eventually come. while labour market improvements have begun to stall, fears about a double-dip recession or a much more pronounced deflationary spiral have been kept at bay.

It reflects more optimism about the future, she said.