The sale of US government bonds accelerated on Thursday, causing yields to skyrocket again a day after the Federal Reserve appeared to calm the market.
In recent trading, the yield on the benchmark 10-year US Treasury bond was 1,731%, according to Tradeweb, compared with 1,641% on Wednesday.
Yields, which rise when bond prices fall, have been rising for months, fueled by expectations of a vaccine-driven economic recovery and government stimulus that investors believe could lead to significantly higher inflation. and eventually force the Fed to raise short-term interest rates. .
On Wednesday, yields fell after the central bank released its latest policy statement, which once again showed officials plan to take a patient approach to raising benchmark federal funds rates as they try to push inflation above your 2% goal for a sustained period.
Short-term Treasury yields, which are especially sensitive to the outlook for Fed policy, led the declines when Fed Chairman Jerome Powell reinforced that message at a press conference.
However, yields on Treasuries due in just five years rose sharply again on Thursday, a sign of the severe headwinds facing the market.
Despite the signals from the Fed, many investors think the central bank will have to start raising interest rates as early as 2023 to combat an anticipated surge in inflation. The Fed’s promise to support the economy now could even lead to faster rate hikes down the road because it could help drive the kind of inflation that has been largely missing for the past decade, these people argue.
Meanwhile, other factors are also working against bonds, including a large increase in the supply of Treasuries as the government finances trillions of dollars in coronavirus relief spending and uncertainty over whether the Fed will extend the relief. temporary regulatory framework for large banks that could directly affect how much. they have in the treasury in the future.
Adding to the pressure on the market on Thursday was a report that the Bank of Japan could allow the yield on Japanese 10-year government bonds to trade in a wider range, some analysts said. A strong Australian employment report added to the weakness of the bond market during overnight trading.
“My interpretation is that President Powell gave us the green light for reflationary trading yesterday, and the absence of any buying interest due to the fall. [overnight]…. it reconfirmed this idea that no one is willing to step up in this trade yet, ”said Ian Lyngen, head of US rate strategy at BMO Capital Markets.
Investors and analysts pay close attention to US Treasury yields because they help determine interest rates throughout the economy. Higher yields generally translate into higher borrowing costs for individuals and businesses, making some wonder if the Fed could try to stop the trend by increasing its monthly purchases of longer-term Treasuries.
However, Fed officials have repeatedly suggested that they see no reason to take that step just yet because strong demand for riskier assets, such as corporate stocks and bonds, has meant that companies still have access to cheap financing.
Write to Sam Goldfarb at [email protected]
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