Treasurys, like the nation which issues them, are at a critical juncture. That was the overarching message from the latest Weekly which you should read if you haven’t yet.

10s are ~4.25% in the US, up markedly since the September FOMC meeting, and Harley Bassman’s MOVE gauge reflects considerable election angst.

To the extent any portion of the bond selloff’s attributable to rising “red sweep” odds on betting sites, it’s absurd but also deliciously ironic: The deepest, most liquid market on Earth (the Treasury market) taking its cues from “markets” which, by appearances anyway, have trouble absorbing a couple of measly million (US)dollar(coin)s.

The BBG screengrab below’s from Nomura’s Charlie McElligott. “[M]arkets have aggressively hedged for the perceived momentum behind a Trump ‘red sweep,’ which is the most bearish-duration outcome, due to the extremely stimulative policy mix of bulk deregulation and tax cuts, along with ‘day 1’ price-shock tariffs.”

Again, there’s something hilarious about the “correlation” between an NY Fed model of the term premium and election odds as priced by a website that US citizens need a VPN, a crypto wallet and Polygon-chained USDC to access and trade on.

Anyway, there’s a ton of two-sided risk here. On the rates selloff extension side, consider that although many longs built across the five-month US bond rally (that’d be the rally which hit a wall this month) are unwound, there’s one legacy long in bonds and STIRs left, according to McElligott: CTAs.

In his Monday missive, he described “ongoing deleveraging risk” from the managed futures space, which has already accounted for almost $150 billion of selling pressure over the past month across G10 bonds and STIRs. That universe “remain[s] massively skewed towards further supply,” McElligott cautioned, noting that another 2% to the downside for rates futures could trigger nearly half a trillion in selling (see the estimates in the red-boxed “total” rows on the right, below).

So, if this week’s data skews hot and the “red sweep” predicted by Polymarket comes to fruition, there’s potential for systematic flows to exacerbate a selloff extension in bonds and rates.

Of course, it’s possible Polymarket’s collectively full of sh-t — to put it indelicately — and the election results in President Harris with a split Congress. In that case, it’s highly likely that the term premium rebuild will reverse and bonds will rally.

As Charlie put it, “the largest local shock to bond markets [is] the ‘Harris surprise’ outcome, particularly ‘Harris + Gridlock / Split,’ which would set off reversal risk across assets [and] particularly with bonds rallying / squeezing higher in what’s likely a bull-flattening after so much ‘Trump / Red Sweep’ hedging in recent weeks.”