NEW YORK, Oct 22 (Reuters) – U.S. Treasury yields hit a three-month high on Tuesday as hedging ahead of the Nov. 5 U.S. election and expectations of a looser Federal Reserve policy dampened demand for U.S. government debt.

Shifting momentum toward a more likely Donald Trump presidency has weighed on bonds as Trump’s policies, including tariffs and restrictions on illegal immigration, are expected to increase inflation.

Monday’s sharp selloff in bonds “was driven in part by forecast markets pricing in higher odds of a Trump victory,” said Gennady Goldberg, head of U.S. rates strategy at TD Securities in New York.

Betting site Polymarket on Tuesday showed Trump’s chances of winning the presidency at 66%, compared with 34% for Kamala Harris.

“Tariffs and immigration tightening will be stagflationary shocks,” Goldberg said, adding that “it’s very likely that you’ll see an inflationary impact first because it transmits the data much faster.”

The US budget deficit is also expected to worsen under a Trump or Harris presidency, which could lead to an increase in the supply of Treasuries next year.

The yield on the benchmark 10-year note last rose 2.2 basis points to 4.204%, having previously reached 4.222%, its highest level since July 26.

The two-year yield rose 1 basis point to 4.035%.

The two-year and 10-year yield curves widened slightly to 16.7 basis points.

“The market is very much trading on the Trump deal right now, and so I think there is a danger that we will continue to push for higher yields,” said Tom Fitzpatrick, head of global market analysis at RJ O’Brien.

A strong October jobs report next week could also lift yields and perhaps cause traders to rethink whether the Fed will cut rates next month.

“I don’t think it’s inconceivable that the Fed will actually reconsider its move in November, it’s entirely possible that the market thinks so,” Fitzpatrick said. “Tightening yields seems like a real danger here.”

A much stronger-than-expected September jobs report had investors underestimating the likelihood that the U.S. central bank would cut interest rates more than usual. Last month, the Fed cut rates by 50 basis points.

Traders are currently estimating a 42 basis point rate cut by the end of the year, indicating a less than 100% chance that the Fed will implement a 25 basis point cut at each of its next two meetings.

The Treasury Department will sell $13 billion of 20-year bonds on Wednesday and $24 billion of five-year Treasury inflation-protected securities on Thursday.

(Reporting by Karen Brettell; Editing by Nick Zieminski)