Treasury Yields Jump Again on Covid-19 Stimulus, Jobs
By Paul J. Davies
U.S. Treasury yields jumped Monday following the Senate's
approval of the $1.9 trillion Covid-19 relief bill over the
weekend, which moves President Biden's key spending package closer
to being signed into law.
The huge stimulus, which faces a final vote in the House as
early as Tuesday, is expected to boost the U.S. economy just as
vaccinations allow more businesses to reopen, driving a burst of
activity and a likely pickup in inflation.
The 10-year yield briefly rose as high as 1.610% on Monday
morning, surpassing the 1.609% hit when Treasurys sold off sharply
on Feb. 25, according to Tradeweb, before dropping back to 1.598%.
Bond yields rise when prices fall.
The rise in yields is also putting pressure on growth stocks,
such as technology companies, whose valuations are linked to
prevailing discount rates for long-term cashflows. The Nasdaq-100
dipped 1.7% in futures markets Monday morning.
The Federal Reserve has been sanguine in its response to rising
yields because it sees them as a sign of the brightening outlook
for the economy. It also now targets an average inflation rate over
time, which means the central bank would allow inflation to run
above its 2% target for a spell before tightening monetary
Investors are having trouble adjusting to this new policy
framework. There is confusion about where yields will settle and
some skepticism that the Fed will stick to its low rates and
"The market still hasn't completely absorbed the idea of the
average inflation targeting regime," said Sebastien Galy, senior
macro strategist at Nordea Asset Management. He also pointed to the
strong jobs report on Friday and a test for the market with a big
auction of new 10-year Treasurys coming up on Wednesday. He expects
10-year yields to move toward 1.8%.
A rise in real yields -- or the yields on inflation-protected
Treasurys, known as TIPS -- is potentially more important in
judging how and when the Fed might change its policy. These haven't
risen as much as normal yields and the gap between the two has
grown, which indicates higher inflation expectations.
On Monday, 10-year inflation expectations hit 2.24%, the highest
since the summer of 2014. Shorter-term inflation expectations have
risen even faster, with the five-year measure exceeding 2.55%
This suggests expectations that a rise in inflation will be
followed by the Fed taking action and bringing inflation back
toward the target over the longer term. However, if real yields
start to rise faster, especially at shorter maturities, that would
suggest market skepticism over Fed policy, according to Neil
Shearing, group chief economist at Capital Economics.
That "might indicate that the markets do not believe the Fed's
commitment to keeping its policy rate at near-zero until it has
achieved a 'broad and inclusive' recovery," Mr. Shearing said.
The difference between real yields on five-year and 10-year
TIPS, which measures the steepness of the curve, has been rising
steadily since last April and has reached almost 1.1 percentage
points. That is the steepest the curve has been since April 2014.
However, it hasn't changed for three days now. If the gap begins to
decline due to rising five-year real yields, that would suggest
investors expect faster rate increases from the Fed.
Yields have also been pushed higher by a series of technical
factors including worries about constraints on bank balance sheets
and the unwinding of leveraged bets linked to the relative yields
of different Treasurys.
In the past week, there has also been a big pickup in outright
bets by hedge funds that yields will keep rising and hefty sales of
Treasurys by leveraged funds that trade based on market volatility,
according to data from Citigroup's quantitative analysts.
Write to Paul J. Davies at email@example.com
(END) Dow Jones Newswires
March 08, 2021 08:35 ET (13:35 GMT)
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