It became more difficult for Wall Street to see U.S. Treasury yields go up without feeling a little queasy.
After all, the Federal Reserve has made cheap and abundant credit a key part of its response to the pandemic, with the result that large American corporations borrowed a record amount of debt last year, at ultra-low rates, to bolster their balance sheets during the crisis.
Low rates also helped a record $ 4.3 trillion in home loans in the United States originate in 2020, with refinancing for the year reaching a record $ 2.8 trillion while homeowners sought a break. on their mortgage payments, according to the Black Knight’s Report.
And as the COVID-19 vaccinations have accelerated under the Biden administration, it may come as no surprise that borrowing costs, both for corporate debt and for the American housing market, have gotten a little more expensive this year as earnings from the Long-term treasure soared.
This CreditSights chart shows the yield of the 30-year Treasury TMUBMUSD30Y,
it has risen about 65 basis points so far this year, to about 2.3%. This almost corresponds to the December 31, 2019 level, or before the first COVID-19 cases were detected in the U.S.
Treasury yields go up.
CreditSights, Bloomberg
Yields of the 10-year Treasury note TMUBMUSD10Y,
were about 68 basis points higher on Monday, close to 1.594%, according to the Dow Jones Market Data.
But that is still below the pre-pandemic level of 1.92% of the 10-year yield, probably meaning that the benchmark title has more room to rise, according to a CreditSights team led by senior analyst Erin Lyons.
The rise in government bond yields has already been reflected in the rise in 30-year fixed-rate mortgages, which last week averaged 3.02%, a level not seen since July.
Reading: Mortgage rates rise above 3% – how high can they go before they scare home buyers?
Companies have also been rushing to borrow on the corporate bond market to anticipate potentially higher rates, with the yield on the ICE BofA US Corporate Index rising to around 2.2% on the last check, from a recent low of 1, 79% in January.
Bank of America Corp. BAC,
borrowed $ 5.5 billion from the investment-grade corporate bond market on Monday, with its longest share of the 30-year debt yielding around 3.48%, according to a person familiar with the negotiations.
But rising bond yields have also spurred a stock turnover, which helped launch the high-tech Nasdaq Composite Index COMP,
in the correction territory on Monday, as defined by a drop of at least 10%, but less than 20%, from its recent peak.
The DJIA of the Dow Jones Industrial Average,
ended Monday about 300 points above, but shy of 32,000, with investors weighing the potential impact of a $ 1.9 trillion aggressive stimulus package from Congress on consumer spending habits – and inflation – as that the recovery gains momentum.
So how high can Treasury yields go? “Given the current expectation of 2.25% bond market inflation (ie, the 10-year equilibrium rate), there is still a lot of room for yields to rise,” wrote James Paulsen, chief investment strategist at Leuthold Group, in a note on Monday.
“Our guess is that the 10-year yield will exceed 2% this year, but who really knows?”
Analysts point out that much will depend on whether the Fed will eventually be forced to change the course of its easy money policies to tackle persistent and long-lasting inflation beyond its targets, perhaps raising benchmark rates above the current level of 0% to 0, 25% ahead of expectations, or reducing its $ 120 billion per month bond purchase program, which could drain liquidity from the financial markets.
“I think the Fed is likely to act if the 10-year U.S. Treasury yield increases rapidly from here and creates cluttered markets,” wrote Kristina Hooper, Invesco’s chief global market strategist, in a note on Monday. .
But Hooper also does not expect inflation to become “problematic”, mainly because of the significant slack that exists in the labor market due to the pandemic, as well as long-term structural forces, including technological innovations, that will keep the pressure down on inflation.
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