Yields on U.S. long-term bonds reached their highest level in a year, the latest sign that investors hope President Joe Biden’s stimulus plan will boost US economic growth and ultimately lead to higher levels of inflation.
In the first trades in New York, the 30-year Treasury yield was trading at 1.99 percent, having previously risen above 2 percent for the first time since last February. It has risen about 0.36 percentage points since the end of last year.
The rise in yield, which reflects a fall in the price of US government debt, comes at a time when the Biden government is pushing legislators in Congress to approve a broad $ 1.9 trillion stimulus package. The injection would follow a $ 900 billion package approved last year and a $ 3 trillion scheme early in the pandemic.
Some economists and investors are concerned that the strong fiscal boost, combined with the unprecedented monetary policy measures launched during the crisis by the Federal Reserve, will fuel a significant increase in inflation.
“For me, it will be difficult not to see inflation in something when we have what is likely to be a short-term stimulus,” said Jim Reid, an analyst at Deutsche Bank. “Whether this will be in goods, wages or asset prices (or all three) is not yet known, but it seems inevitable that there will be an impact.”
An important measure of market inflation expectations, known as the 10-year equilibrium rate, rose to 2.2 percent on Monday – the highest level since 2014, according to data from Bloomberg.
Still, an underlying barometer of consumer price inflation that excludes food and energy costs increased at an annual rate of just 1.6 percent in December, according to government statistics.
Larry Summers, who served as Bill Clinton’s Treasury Secretary, warned last week that Biden’s plan could unleash “inflationary pressures of a kind we haven’t seen in a generation, with consequences for the dollar’s value and financial stability.”
US Treasury Secretary Janet Yellen dismissed these concerns in a television interview over the weekend, saying American policymakers should focus on strengthening the labor market.
“I spent many years studying inflation and worrying about it. And I can say that we have the tools to deal with this risk if it materializes, ”she said.
Expectations that the vaccine’s implementation, combined with economic stimulus measures, will help boost the US economy, raised long-term rates more quickly than short-term rates. The so-called interest curve, which measures this yield gap, reached its highest point last week since 2015.
This trend was due to “positive news about the pandemic, some better-than-anticipated economic data and increased expectations of fiscal stimulus,” JPMorgan analysts said on Friday.
The Wall Street investment bank predicted that Congress would eventually agree to a $ 900 billion stimulus bill, but said recent Senate maneuvers suggested the package could be larger than anticipated.
“It stands to reason that if Congress approved a larger package, it would increase growth expectations, resulting in higher Treasury yields than our basic projections,” added the bank.