Surging U.S. Yields Show Stimulus Impact Still Getting Priced In

by Vivien Lou Chen, Stephen Spratt, Greg Ritchie, 2/17/21

U.S. Treasury yields rose to the highest since February 2020 and are at risk of climbing further, as investors start to factor in the full economic impact of a stimulus plan totaling as much as $1.9 trillion.

Rates on 10-year notes, a benchmark for global borrowing, eclipsed their peak from the March market pandemonium, reaching 1.31%. The selloff extended across developed-economy debt markets, gaining momentum as the U.S. House leadership laid out a plan to vote by month-end on President Joe Biden’s aid proposal.

The fixed-income losses are generating the worst start to a year since 2013 for a gauge of global bond performance. Investors are buying into signs the world’s economy is moving toward a recovery from pandemic-induced shutdowns, prompting asset managers to ditch bonds for stocks. The tumble in Treasuries could be about to accelerate, with strategists saying mortgage-related hedging may kick in if yields rise much higher.

“The move up in nominal yields, driven by real rates, suggests that upside risks to growth and supply -- given greater chances of a package as large as $1.9 trillion -- are getting priced in,” said TD Securities strategist Priya Misra. Moreover, “the move can continue for now because real rates are still near historic lows.”

The 10-year real yield -- which strips out inflation and is seen as a pure read on growth prospects -- climbed to minus 0.93%, the highest in about a month.

Foreign Holdings of U.S. Treasuries Fell for Fifth Month in December.

Tantrum Risk

For Misra, the selloff could get unruly, resulting in “a tantrum without the taper,” unless Federal Reserve Chairman Jerome Powell leans against the move in an appearance scheduled for next week. She was referring to the 2013 taper tantrum episode, in which former Chairman Ben Benanke’s hint of an early paring of bond purchases jolted yields sharply higher.

Investors also had rising energy prices on their radar. A key market proxy for 10-year inflation expectations reached the highest since 2014.