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MONEY MARKETS-U.S. swap spreads widen on potential for lower pandemic stimulus

NEW YORK, Nov 4 (Reuters) - Spreads on benchmark U.S. interest rate swaps widened over concerns that the election will result in a split Congress and could mean a lower stimulus package to counter the effects of the COVID-19 pandemic.

While the presidential race between Democratic presidential candidate Joe Biden and Republican President Donald Trump was too close to call on Wednesday, emerging results from down-ballot races pointed to Republicans maintaining a majority in the Senate..

Spreads of interest rate swaps are typically viewed as indicators of market risk. A higher positive spread suggests market participants are willing to swap their risk exposures, suggesting overall risk aversion.

“Spreads are wider due to expectations of lower deficits, the potential for a split government, or even a status quo government because Donald Trump can still win the presidential race,” Gennadiy Goldberg, senior rates strategist at TD Securities in New York, said.

“This suggests that the stimulus deal is likely to be smaller than larger. Less supply means more demand for Treasuries,” he added.

Long-dated U.S. Treasury prices rose, with yields falling from five-month highs, as concerns of prolonged election uncertainty have cast doubt over a much-needed spending package.

Spreads also widened after the U.S. Treasury said on Wednesday at its refunding announcement that it is slowing increases in issuance. On Monday, the Treasury said it plans to borrow $617 billion in the fourth quarter, lower than the August estimate due to the department’s higher cash balance at the beginning of October. .

In late morning trading, the 10-year dollar interest swap spreads -- which measures the cost of exchanging dollar-denominated, fixed-rate cash flows for 10-year floating-rate ones -- rose to 2 basis points, from 0.5 basis point late on Tuesday.

Meanwhile, U.S. inflation breakevens, the bond market’s gauge of investors’ inflation outlook, fell to its lowest since early October. The yield spread between 10-year Treasury Inflation Protected Securities, or TIPS, and 10-year Treasury notes was 1.6529%, the lowest since early October.

“Breakevens will very much move with risk,” TD’s Goldberg said. “If there is lower expectation of stimulus, that’s not good for breakevens.” (Reporting by Gertrude Chavez-Dreyfuss; Editing by Alexander Smith)