For Wall Street, it has become more difficult to keep up with US Treasury yields without feeling a little difficult.
After all, the Federal Reserve has made cheap and plentiful credit an essential part of its response to the pandemic, with large U.S. corporations borrowing a record amount of debt last year at very low rates to bolster their balance sheets. during the crisis.
Low interest rates also contributed to a record US $ 4.3 trillion in residential housing loans due in 2020, with refinancing for the year reaching an all-time high of $ 2.8 trillion. , as homeowners sought a break from their mortgage payments, according to a Black Knight Report.
And as COVID-19 vaccinations have accelerated under the Biden administration, it may come as no surprise that the costs of borrowing both in corporate debt and in the U.S. real estate markets have become a little more expensive this year, as longer-term Treasury yields went higher.
This CreditSights chart shows TMUBMUSD30Y’s 30-year treasury yield,
increased by about 65 basis points this year to about 2.3%. This almost matches the level of December 31, 2019 or before the first COVID-19 cases are detected in the US
Treasury yields are rising.
CreditSights, Bloomberg
Yields on the 10-year treasury note TMUBMUSD10Y,
were 68 basis points higher from Monday to date, close to 1.594%, according to Dow Jones Market data.
But this is still below the pre-pandemic 10-year yield of 1.92%, which probably means the benchmark has more room for growth, according to a CreditSights team led by lead analyst Erin Lyons.
Rising government bond yields have already been reflected in the rise in 30-year fixed-rate mortgages, which last week averaged 3.02%, a level not seen since July.
Read: Mortgage rates rise above 3% – how high can they go before they scare home buyers?
Companies also rushed to borrow on the corporate bond market to surpass potentially higher rates, with the yield on the ICE BofA US corporate index rising to around 2.2% at the last check, from a recent low of 1.79% in January.
Bank of America Corp.. BAC,
on Monday, it borrowed $ 5.5 billion in the investment-grade corporate bond market, the longest 30-year period of debt yielding about 3.48%, according to a person with knowledge of transactions.
But rising bond yields have also led to a stock rotation, which has helped the Nasdaq COMP Composite Index,
months on the correction territory, as defined by a decrease of at least 10%, but less than 20%, from the recent peak.
Dow Jones Industrial Average DJIA,
ended on Monday with about 300 points more, but shy of 32,000, as investors weighed the potential impact of a $ 1.9 trillion aggressive stimulus package from Congress on consumer spending habits – and inflation – on as recovery gathers steam.
So how high can Treasury yields increase? “Given the expectations of current bond market inflation of 2.25% (ie the 10-year rate of return), there is still enough room to increase yields,” wrote James Paulsen, Leuthold Group’s chief investment strategist, in a statement. note Monday.
“We assume that the 10-year yield will reach another 2% this year, but who really knows?”
Analysts point out that much will depend on whether the Fed will be forced to change the course of its policies with light money to combat persistent and sustainable inflation beyond its targets, probably by raising reference rates above the current level from 0% to 0, 25% earlier than expected or by reducing its monthly bond purchase program by $ 120 billion, which could drain liquidity from financial markets.
“I think the Fed is likely to act if the 10-year US Treasury yield grows rapidly from here and creates messy markets,” Kristina Hooper, Invesco’s global market strategist, wrote in a note Monday.
But Hooper also does not expect inflation to become “problematic,” namely because of the significant weakness in the labor market due to the pandemic, as well as long-term structural forces, including technological innovations, that will keep the pressure down. on inflation.
Read on: Is housing a luxury? Here’s what a K-shaped recovery means for real estate