For Wall Street, it has become harder to see U.S. Treasury yields rise without feeling a little unsettling.
After all, the Federal Reserve made cheap and abundant credit a key part of its response to the pandemic, with the result that large U.S. corporations borrowed a record amount of debt last year. , at extremely low rates, to strengthen their balance sheets during the crisis.
Low rates also helped hit a record $ 4.3 trillion in U.S. home loans in 2020, with a year-over-year refinancing that hit an all-time high of $ 2.8 trillion. as homeowners sought a break in their mortgage payments, according to a new Black Knight Report.
And as COVID-19 vaccinations have accelerated under the Biden administration, it may come as a surprise that the borrowing costs of both corporate debt and the U.S. housing markets have become a little more expensive this year, as longer-term Treasury yields go up.
This CreditSights chart shows the performance of the 30-year Treasury TMUBMUSD30Y,
rose about 65 basis points so far this year to 2.3%. This almost coincides with the level of December 31, 2019 or before the first COVID-19 cases were detected in the US
Treasury yields increase.
CreditSights, Bloomberg
10-year Treasury note yields TMUBMUSD10Y,
on Monday they were about 68 basis points higher than the previous year, about 1.594%, according to Dow Jones market data.
But that is still below the pre-pandemic level of 1.92% ten-year yield, probably meaning the benchmark bond has more room to rise, according to a CreditSights team led by senior analyst Erin Lyons .
The increase in government bond yields has already been reflected in the rise in 30-year fixed-rate mortgages, which last week reached an average of 3.02%, a level not seen since July.
Read: Mortgage rates soar above 3%: How scared can buyers be?
Companies have also rushed to apply for loans in the corporate bond market to advance to potentially higher rates, with a yield on the US ICE BofA Corporate Index rising to 2.2% in the last check , from a recent low of 1.79% in January.
Bank of America Corp.. BAC,
borrowed $ 5.5 billion in the investor-quality corporate bond market on Monday, with a 30-year longer debt portion that yielded about 3.48%, according to a business acquaintance.
But rising bond yields have also been driving a stock rotation, which helped get the Nasdaq COMP Composite Index, a heavy technology.
in correction territory on Monday, as defined by a drop of at least 10%, but less than 20%, from its recent high.
The Dow Jones Industrial Average DJIA,
ended on Monday about 300 points more, but shy of 32,000, as investors weighed in on the potential impact of an aggressive $ 1.9 trillion stimulus package from Congress on consumer spending habits and inflation , as the recovery gains strength.
So how far can Treasury yields go? “Given current bond market inflation expectations of 2.25% (i.e. the ten-year inequality rate), there is still much room to increase yields,” wrote James Paulsen, strategist of investments in chief of The Leuthold Group, in a note Monday. .
“Our assumption is that the ten-year yield will default 2% this year, but who really knows?”
Analysts note that much will depend on whether the Fed ends up forcing itself to change the course of its easy money policies to combat persistent and lasting inflation beyond its targets, perhaps raising benchmark rates above the current level of 0% to 0.25% sooner than expected, or reducing its $ 120 billion a month bond purchase program, which could drain financial market liquidity.
“I think the Fed is likely to act if the yield on the U.S. Treasury in ten years increases 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,” that is, because of the significant influx into the labor market due to the pandemic, as well as the long-term structural forces, including technological innovations, that they will keep the pressure on low inflation.
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