Treasury yields increase again with Covid-19 stimulus, jobs

The 10-year yield rose briefly to 1.610% on Monday morning, surpassing that of 1.609% when Treasury bills sold strongly on February 25, according to Tradeweb. Subsequently, it fell to 1.594%, which represented an increase in relation to Friday’s closing of 1.550%. Bond yields increase when prices fall.

The increase in earnings is also putting pressure on growth stocks, such as technology companies, whose valuations are linked to current discount rates for long-term cash flows. The Nasdaq-100 fell 0.7% early Monday afternoon.

The Federal Reserve has been optimistic in its response to rising yields because it sees them as a sign of optimistic outlook for the economy. It now also targets an average rate of inflation over time, which means that the central bank would allow inflation to exceed its 2% target for a period before restricting monetary policy.

Investors are having trouble adjusting to this new policy framework. There is confusion about where yields will be accommodated and some skepticism that the Fed will keep its rates low and its bond-buying program.

“The market has not yet fully absorbed the idea of ​​the average inflation targeting regime,” said Sebastien Galy, senior macro strategist at Nordea Asset Management. He also pointed to the strong jobs report on Friday and a test for the market with a large auction of new 10-year Treasury bonds on Wednesday. He expects 10-year earnings to rise to 1.8%.

An increase in real yields – or in yields on inflation-protected Treasury bills, known as TIPS – is potentially more important in judging how and when the Fed can change its policy. These have not risen as much as normal earnings and the gap between the two has widened, indicating higher inflation expectations.

On Monday, 10-year inflation expectations reached 2.24%, the highest since the summer of 2014. Short-term inflation expectations rose even faster, with the five-year measure exceeding 2.55% in Monday.

This suggests expectations that an increase in inflation will be followed by action by the Fed and bringing inflation back to the long-term target. However, if real yields start to rise faster, especially in shorter timeframes, this suggests market skepticism about the Fed’s policy, according to Neil Shearing, the group’s chief economist at Capital Economics.

This “may indicate that the markets do not believe in the Fed’s commitment to keeping its interest rate close to zero until it has achieved a ‘broad and inclusive’ recovery,” said Shearing.

The gap between the real yields of the five- and ten-year TIPS, which measures the slope of the curve, has steadily widened since last April and reached almost 1.1 percentage points on Friday. This is the biggest slope of the curve since April 2014. However, it dropped to 1.04 percentage points on Monday. If the gap narrows further due to the five-year increase in real yields, it would suggest that investors expect faster increases in Fed rates.

The difference between the real yields of the five- and ten-year TIPS, which measures the slope of the curve, has steadily widened since last April and has reached almost 1.1 percentage point. This is the steepest curve since April 2014. However, it hasn’t changed in three days. If the gap starts to narrow due to the five-year increase in real yields, it would suggest that investors expect faster increases in Fed rates.

Yields were also driven upward by a number of technical factors, including concerns about restrictions on bank balance sheets and the unfolding of leveraged bets linked to the relative yields of different Treasury bills.

Last week, there was also a huge increase in hedge fund direct bets that yields will continue to rise and heavy sales of Treasury bills by leveraged funds that trade based on market volatility, according to data from Citigroup.in

quantitative analysts.

Write to Paul J. Davies at [email protected]