The yield on the 10-year U.S. Treasury benchmark hit 1% for the first time since March, after tightly-fed Georgia second-round election returns bet the Democrats could win the close control of the Senate.
In the early hours of Wednesday afternoon, in Hong Kong, the yield on the US Treasury note at ten years was precisely 1,000%, according to Tradeweb, from 0.955% at the close of 15: 00 ET on Tuesday.
Yields, which rise as bond prices fall, began to rise around 7.30pm ET when early election returns began to erupt, showing extremely tight races but with better-than-expected results for Democratic candidates.
The victories of both races would effectively give Democrats 51 votes in the Senate, with the reluctant vote of Vice President-elect Kamala Harris — a result many investors believe would augur more in pandemic relief efforts. and other democratic priorities, such as infrastructure projects.
Increasing public spending without the corresponding tax increases tends to increase Treasury yields, in part because it augurs more public lending and a greater supply of bonds. Depending on the rate of spending, it can also increase yields by increasing economic growth and inflation and making the Federal Reserve more likely to raise short-term interest rates.
If Democrats win in Georgia, “you will indeed have your blue blow,” said Priya Misra, head of global rate strategy at TD Securities in New York. While it would still be difficult for Democrats to pass comprehensive legislation, it would at least make it easier for Congress to pass popular measures such as increased unemployment benefits or larger stimulus payments, he said.
Long-term Treasury yields play an important role in the economy, helping to fix interest rates on everything from corporate bonds to mortgages. Over the past nine months, ultra-light yields have simultaneously shown skepticism about the economic recovery and helped bolster it by dragging on borrowing costs and encouraging investors to buy riskier assets, such as stocks and corporate debt.
The 1-year yield recovery at 1%, after collapsing to record lows early in the pandemic, reflects a cheerful but hardly spectacular economic outlook.
In March, the yield on the 10-year Treasury note fell briefly below 0.4% on an intraday basis as investors understood the full implications of the coronavirus crisis. For much of the summer, it remained trapped around two-thirds of a percentage point.
Yields had risen more recently following the approval of coronavirus vaccines, which investors hope could domesticate the pandemic, as well as new legislation designed to support the economy until vaccines are more widely distributed. They had gained momentum on Tuesday thanks to surprisingly strong U.S. manufacturing 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, dampening their expectations of what the economy will look like even after returning. to more normal situations.
A sign of improving investor sentiment is that annual inflation expectations over the next decade, stemming from the difference between nominal Treasury yields and those protected by inflation, rose above 2% this week for the first time. since 2018. This rate had dropped as low as 0.5% in March.
—Joanne Chiu contributed to this article.
Write to Sam Goldfarb at [email protected]
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