Yield on the 10-year US Treasury benchmark reached 1% for the first time since March, after the returns from Georgia’s run-off elections fueled bets that Democrats could gain close control of the Senate.
In the early afternoon in Hong Kong on Wednesday, the yield on the 10-year US Treasury reference note was precisely 1,000%, according to Tradeweb, compared to 0.955% at its close at 3 pm ET on Tuesday .
Yields, which rise when bond prices fall, began to rise around 7:30 pm Eastern time, as early election returns began to arrive, showing extremely fierce disputes, but better than expected results for Democratic candidates.
Victories in both contests would effectively give Democrats 51 votes in the Senate, counting Vice President-elect Kamala Harris’ tiebreaker vote – a result that many investors think would represent greater spending on pandemic relief efforts and other Democratic priorities, such as infrastructure projects.
The increase in government spending without corresponding tax increases tends to raise Treasury yields, in part because it portends more government loans and a greater offer of bonds. Depending on the type of spending, it can also increase yields by stimulating economic growth and inflation, and making the Federal Reserve more likely to raise short-term interest rates.
If Democrats win in Georgia, “you will effectively have your blue belt,” said Priya Misra, head of global rate strategy at TD Securities in New York. While it is still difficult for Democrats to pass comprehensive legislation, it would at least make it easier for Congress to pass popular measures, such as raising unemployment insurance or higher stimulus payments, she said.
The Treasury’s long-term yields play an important role in the economy, helping to set interest rates on everything from corporate bonds to mortgages. Over the past nine months, ultra-low yields have simultaneously signaled skepticism about the economic recovery and helped to reinforce it, reducing borrowing costs and driving investors to buy riskier assets such as stocks and corporate debt.
The recovery of 10-year earnings to 1%, after collapsing to record levels at the beginning of the pandemic, reflects a bright, but hardly spectacular, economic outlook.
In March, the yield on the 10-year Treasury bill fell briefly below 0.4% on an intraday basis, when investors began to face all the implications of the coronavirus crisis. For much of the summer, it remained stagnant at about two-thirds of a percentage point.
Yields have increased even more recently after the approval of coronavirus vaccines, which investors hope to be able to control the pandemic, as well as new legislation designed to support the economy until the vaccines are more widely distributed. They got a boost on Tuesday with surprisingly solid data from American industry.
At the same time, yields remain low by historical standards. This is largely because investors have experienced a decade of slow growth and even warmer inflation after the 2008-2009 financial crisis, reducing their expectations of what the economy will look like even after it returns to a more normal situation.
A sign of improving investor sentiment is that expectations for annual inflation over the next decade, derived from the difference between nominal and protected yields from Treasury inflation, have risen above 2% this week for the first time since 2018. That rate had dropped to levels as low as 0.5% in March.
—Joanne Chiu contributed to this article.
Write to Sam Goldfarb at [email protected]
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