A wave of sales of government bonds in the US intensified on Thursday, with yields rising after new data showed a strong economic recovery and a seven-year treasury auction met with strong demand from investors.
The yield on the 10-year Treasury benchmark reached 1.539% and was recently 1.501%, according to Tradeweb – up from 1.388% at the close on Wednesday. The movements were also pronounced in bonds with shorter dates, the five-year yield at one point reaching 0.865%, up from 0.612% on Wednesday.
Yields, which are rising as bond prices fall, rose after the Department of Labor data showed that the number of unemployed applications fell sharply last week, signaling that the job market could stabilize after increased layoffs earlier in the winter.
Investors tend to sell treasuries when they expect faster growth and inflation, which reduces the value of fixed bond payments and may eventually lead the Federal Reserve to raise short-term interest rates.
Yields rose later in the session, following a $ 62 billion seven-year Treasury bid, which analysts said showed little interest from investors.
“The middle zone of the curve has suffered a really violent sale in the last 2 days, and the auction results suggest that no one has the stomach to try to intervene to turn the tide,” Jefferies analysts wrote in a note after the auction.
Thursday’s move expands a recent rise in government bond yields, which has begun to capture investors’ attention in a number of asset classes. The yield on the 10-year bond, which is a problem for borrowing costs, from mortgages to corporate loans, has risen to nearly 1.5% from about 1% in a few weeks, high on high expectations that vaccines and government stimulus efforts will accelerate growth and inflation.
While Federal Reserve officials say rising yields to pre-pandemic levels mark a return to normalcy and not a problem, some investors are worried that high inflation could force the central bank to raise interest rates faster than expected, he said. Gennadiy Goldberg, TD Securities Strategist at USA.
“Right now, it looks like no one really wants to buy a bathroom,” he said.
Fed Chairman Jerome Powell told lawmakers this week that while the economy has grown from the depths of the slowdown, the central bank intends to keep its policies light-hearted until “substantial progress” is made toward its employment targets and inflation. The central bank has cut interest rates to near zero and pledged to buy billions of dollars in bonds to cut US borrowing costs and help recover.
Fed officials’ comments that they are not worried about rising yields have only added to selling pressure on the bond market, analysts said. For most of last year, investors have expressed confidence that the Fed – to support the economy – will prevent yields from rising by more than 1% by increasing the amount of long-term cash it buys each month. But that confidence has evaporated since then, removing a key constraint on rising yields.
Investors are “somewhat offended by this,” said Jim Vogel, an interest rate strategist at FHN Financial, referring to the Fed’s lack of interest in buying more long-term treasuries.
If yields continue to rise, this could put pressure on stocks and increase borrowing costs for companies and consumers, which could raise some concerns about further volatility.
“As rates increase, a lot of products that have used Treasurys as a benchmark tend to increase as well, and that produces natural hedging needs for investors,” Mr Goldberg said.
Write to Sebastian Pellejero at [email protected] and Sam Goldfarb at [email protected]
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