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The disputes will determine control of the Senate for the next two years. Many believe that a Democratic-controlled Senate could make it easier for lawmakers to pass a bigger stimulus. More government spending could lead to higher inflation, which would increase yields.
“It’s almost as if the market is relieved that we are coming to a conclusion and yields are forming a higher range. Investors are betting more deficits, more spending and more Treasury issues if Democrats gain control of the Senate,” said Gregory Faranello, head of US rates at AmeriVet Securities. “Now that the 10-year maturity has broken 1%, we are going to spend some time in the range of 1% to 1.20%.”
Earlier this week, the equilibrium rate for 10-year inflation expectations reached 2% for the first time in more than two years.
It has been a slow recovery for the 10-year rate, which fell to a record low of 0.318% in March, amid a historic flight to safe assets deep in the pandemic. With unprecedented monetary and fiscal stimulus, bond yields gradually tended to rise, but Covid’s persistent uncertainty and uneven economic data kept the rate recovery unstable.
Earlier this week, bond yields were boosted by stronger-than-expected economic data.
A U.S. manufacturing activity index rebounded to a reading of 60.7 last month, the highest level since August 2018, according to the Institute for Supply Management. Economists polled by Dow Jones had forecast the index to drop to 57.0 in December.
Tom Essaye, founder of Sevens Report, said that the drop in yields should not put pressure on risky assets in the short term.
“This would not be a direct obstacle to actions, but it would reinforce that rising yields are an issue that we need to monitor closely in 2021, Essaye said on Tuesday.
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