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The contests will determine Senate control over the next two years. Many believe a Democratic-controlled Senate could make it easier for lawmakers to push for greater stimulus. Higher government spending could lead to higher inflation, which would increase yields.
“It’s almost as if the market is just relieved and we come to a conclusion and yields are forming a higher rank. Investors are betting on more deficits, more spending and more Treasury issues if Democrats gain control of the Senate,” he said. say Gregory Faranello, head of US tariffs at AmeriVet Securities. “Now that the 10 years broke 1%, we will spend time between 1% and 1.20%.”
Earlier this week, the equilibrium rate of ten-year inflation expectations hit 2% for the first time in more than two years.
It has been a slow rise in the ten-year rate, falling to a record low of 0.318% in March amid a historic flight to safe assets in the depths of the pandemic. With unprecedented monetary and fiscal stimulus, bond yields have been gradually rising, but Covid’s persistent uncertainty and uneven economic data have kept rates recovering bumpy.
Earlier this week, bond yields rose thanks to stronger-than-expected economic data.
A U.S. manufacturing activity index rose to a reading of 60.7 last month, the highest level since August 2018, according to the Institute of Supply Management. Economists surveyed by the Dow Jones had forecast the index to fall to 57.0 in December.
Tom Essaye, founder of Sevens Report, said the breakdown of returns should not put pressure on short-term risk assets.
“This would not be a direct wind against stocks, but it would reinforce that rising yields are an issue we need to watch closely in 2021, Essaye said on Tuesday.
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