U.S. Treasury yields in 10 years reached 1% for the first time in more than nine months, with investors betting that Democrats were about to win the Senate, improving Joe Biden’s prospects of bringing his agenda to Congress.
Yield on the 10-year note rose 0.04 percentage points to 1 percent in Asian trading on Wednesday. Yields increase when the price of a security falls.
The victories in the two runoff elections for the Georgia Senate would give Democrats and senators who agree with the party 50 seats in the upper house, which together with the tiebreak vote held by the vice president would put them in control of the two houses of the Congress and the White House.
The yield back-up extended a five-month liquidation of US government debt, which accelerated in early November with the discovery of the BioNTech / Pfizer Covid-19 vaccine.
$ 42 trillion
US stock market size
The pace picked up in December, after Congress agreed to a $ 900 billion stimulus program after months of stalemate. Democrats repeatedly call for more generous help for individuals and direct support for state and local governments, while Republicans advocate less spending.
The possibility of further stimulus under the Biden administration has raised investor sentiment, even as the United States faces a wave of coronavirus cases and the continuing economic malaise before a vaccine is available to most Americans.
Fund managers positioned themselves for an economic revival in late 2021, which they believe will help to reignite inflationary pressures.
A market measure of inflation expectations over the next decade has increased accordingly. The 10-year equilibrium rate, which is derived from inflation-protected U.S. government bond prices, exceeded 2 percent this week – a level last reached in late 2018.
The low rates helped support rising US $ 42 trillion stock market valuations and a reversal could weigh on stock prices. Futures trading pointed to a drop in the value of technology stocks – which were driven by minimum rates – when markets open on Wednesday.
The yield on the 10-year Treasury bill fell below 1% for the first time in history in March, amid a market-driven liquidation of the pandemic.
The Federal Reserve responded by reducing interest rates to zero and intervening strongly in the short-term financing markets. It also pledged to buy an unlimited amount of US government debt and launched 13 lines of credit to support debt markets, including those for junk bonds and municipal bonds.
These actions, along with the unprecedented economic contraction caused by coronavirus-related blockages, suppressed yields and drastically cut government borrowing costs, even when it sold a record amount of new Treasury bills to finance Congressionally approved stimulus packages.
Many strategists predict that the benchmark Treasury yield will rise by up to 1.25% next year, but it is likely that it will be difficult to trade sustainably above that level. They cite the Fed as a potential impediment to dramatically higher yields, given the central bank’s focus on maintaining accommodative financial conditions to support the nascent economic recovery.