The yield on the 10-year benchmark of the US Treasury reached 1% for the first time in March, after the closely watched Georgia election yields fueled bets that Democrats could gain tight Senate control.
In the early afternoon in Hong Kong on Wednesday, the yield on the 10-year US Treasury benchmark was exactly 1,000%, according to Tradeweb, up 0.955% at its close at 3 p.m. Tuesday.
Yields, which are rising as bond prices fall, began to rise around 7:30 p.m. ET, as early election returns began to flow, showing extremely tight races but better-than-expected results for Democratic candidates. .
The gains from both races would effectively give Democrats 51 votes in the Senate when counting the equal vote of President-elect Kamala Harris – a result that many investors believe would herald higher spending on pandemic relief efforts and other democratic priorities , such as infrastructure projects.
Increasing government spending without proper tax increases tends to increase Treasury yields, in part because they predict more government borrowing and a greater supply of bonds. Depending on the type of spending, it can also increase yields by increasing economic growth and inflation and make the Federal Reserve more likely to raise short-term interest rates.
If Democrats win in Georgia, “you actually have it,” said Priya Misra, head of global pricing at TD Securities in New York. While it would still be difficult for Democrats to pass comprehensive legislation, it would at least be easier for Congress to pass popular measures, such as raising unemployment benefits or higher incentive payments, she said.
Long-term Treasury yields play a major role in the economy, helping to set interest rates for everything from corporate bonds to mortgages. Over the past nine months, extremely low yields have simultaneously signaled skepticism about the economic recovery and helped consolidate it, reducing borrowing costs and prompting investors to buy riskier assets such as stocks and corporate debt.
The recovery of the 10-year yield to 1%, after collapsing to record lows at the beginning of the pandemic, reflects a bright but hardly spectacular economic outlook.
In March, 10-year treasury yield fell sharply below 0.4% on an intraday basis, as investors faced the full implications of the coronavirus crisis for the first time. Most of the summer, it was stuck at about two-thirds of a percentage point.
Yields have risen more recently after the approval of coronavirus vaccines, which investors hope can tame the pandemic, as well as new legislation to support the economy until the vaccines are distributed more widely. They gained momentum on Tuesday from surprisingly strong US production data.
At the same time, yields remain low by historical standards. This is largely due to the fact that investors experienced a decade of slow growth and even warmer inflation after the 2008-2009 financial crisis, lowering their expectations of what the economy will look like even after it returns to a higher level. normal.
A sign of improved investor sentiment is that expectations for annual inflation over the next decade, derived from the difference between the Treasury’s nominal and inflation-protected yields, have risen more than 2% this week, for the first time since 2018. This rate has fallen to as low as 0.5% in March.
—Joanne Chiu contributed to this article.
Write to Sam Goldfarb at [email protected]
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