Risk assets are ready to start the week with a boost in their stage, as the US $ 1.9 trillion economic stimulus plan approved by the US Senate and an increase in China’s exports boost confidence in the global recovery.
But everything indicates that there will be additional gains in Treasury income.
President Joe Biden’s Covid-19 relief legislation, which passed on Saturday, exceeded many Wall Street estimates, given the Democrats’ narrow margin of control in the Senate. Although the next move comes back to the House for a final vote, scheduled for Tuesday, economists are already boosting its growth forecasts.
“The House and Senate plans still need to be reconciled before the bill becomes law, but financial markets will focus on the large number of headlines in the Senate version on Monday,” said Mansoor Mohi-uddin, chief economist from the Bank of Singapore Ltd. “The news is likely to put upward pressure on earnings again earlier this week, as the $ 1.9 trillion proposal from the Biden government is close to being fully approved, rather than being reduced. as previously expected. “
Yield on the 10-year Treasury note reached 1.62% on Friday, the highest in more than a year, after stronger than expected US job data – putting the 2% level on the market radar.
Almost exactly a year after the spread of the coronavirus reached global markets, traders are betting that the launch of additional vaccines and government stimuli will guarantee an economic recovery – as well as faster inflation. Even so, Treasury Secretary Janet Yellen on Friday it minimized any concern that the recent rise in US earnings reflects expectations of an exaggerated rise in inflation.
Fluctuations in real US yields – nominal yields minus inflation – will set the tone for global markets, according to Eaton Vance Corp. The actual 10-year yield ended the week at 0.67% less, compared to about 1% less a month ago.
“For me, the main thing to focus on broader markets is real yields,” said Eric Stein, director of fixed income investments at Eaton Vance in Boston. “Nominal earnings are important, but real earnings are really what is driving things in the financial markets.”
All of this could mean declines in the US dollar.
“I still believe that we have the conditions to see the weakness of the dollar,” said Stein. “However, if US Treasury yields continue to sell, particularly at a pace and with the volatility we saw recently, the weaker dollar’s trade will be challenged.”
Federal Reserve Chairman Jerome Powell did little last week to indicate that the central bank could intervene to ease concerns about rising inflation, triggering a sale of Treasury bills. With lawmakers blacked out before the next Fed meeting on March 16 and 17, investors will focus on whether other monetary authorities “will follow the Fed’s relaxed stance on rising yields,” said Mohi-uddin of the Bank of Singapore.
Bank of England Governor Andrew Bailey will deliver a speech on Monday, while European Central Bank officials will set the policy on Thursday.
“If Bailey signals that the BOE is willing to start slowing its quantitative easing, global bond yields will go up, since the BOE will be the second largest central bank, after the Fed, not to push yields up,” he said. Mohi-uddin.