Treasury yields increase again – WSJ

Yields, which rise when bond prices fall, have been rising for months, raised by expectations of an economic recovery fueled by vaccines and government stimuli that investors think could lead to significantly higher inflation and eventually force the Fed to raise short-term interest rates.

On Wednesday, yields declined after the central bank issued its latest policy statement, which again showed that authorities plan to take a patient approach to raising benchmark rates for federal funds while trying to push inflation above its 2% target for a sustained period.

Yields on short-term Treasury bonds, which are especially sensitive to the Fed’s policy outlook, led the falls, with Fed Chairman Jerome Powell reinforcing this message at a news conference.

However, yields on Treasury bonds maturing in just five years rose sharply again on Thursday, a sign of the strong headwinds facing the market.

Despite the signals the Fed is sending, many investors think the central bank will have to start raising interest rates as early as 2023 to combat a predicted rise in inflation. The Fed’s promise to support the economy now may even lead to faster rate hikes later, because it can help generate the kind of inflation that has been lacking in the past decade, these people argue.

In the meantime, other factors are also working against the bonds, including a large increase in the supply of Treasury bills, as the government finances trillions of dollars in spending on coronavirus assistance and uncertainty about whether the Fed will extend temporary regulatory relief to major banks that could directly impact how much they will hold in treasures in the future.

Adding to the pressure on the market on Thursday, there was a report that the Bank of Japan could allow 10-year Japanese government bonds to be traded over a broader range, some analysts said. A strong employment report in Australia further contributed to the bond market’s weakness during the early morning trading.

“My interpretation is that President Powell gave us the green light for reflective trade yesterday, and the absence of any decreasing buying interest. [overnight]… Reconfirmed the idea that no one is willing to get in front of this business yet, ”said Ian Lyngen, head of US rate strategy at BMO Capital Markets.

Investors and analysts pay close attention to US Treasury yields because they help determine interest rates across the economy. Higher yields often translate into higher borrowing costs for individuals and businesses, making some wonder whether the Fed could try to stop the trend by increasing its monthly purchases of longer-term Treasury bills.

Fed officials, however, have repeatedly suggested that they see no reason to take this step, because the strong demand for riskier assets, such as stocks and corporate bonds, means that companies still have access to cheap financing.

Write to Sam Goldfarb at [email protected]