Positive market sentiments and hopes of an economic rebound resulted in yields momentarily rising above 2% (up by almost three basis points) for 30-year US Treasuries on Monday, February 8th. This was the first time this benchmark had been passed since the onset of the global pandemic. In March 2020, yields dipped to 0.702%, their lowest levels during the pandemic. The news came after the U.S. Bureau of Labor Statistics announced Friday that unemployment had dipped to 6.3% in January.
While the country is yet to recover from the impacts of COVID 19, Democrats have expressed their plans to revive the economy from the pandemic-caused recession. Hopes of fiscal impetus from Biden’s government, and significant advances in developing COVID 19 vaccinations, are attributed as major reasons for the change in yields. As per U.S. Treasury Secretary Janet Yellen, if President Joe Biden’s $1.9 trillion financial stimulus package is passed, the country can look to achieve full employment by 2022. The relief package comprises supplemental job benefits and vaccine testing funds, among others.
Owing to this, investors have started opting out of treasuries, stemming a reduction of bond prices, and looking to invest in more riskier asset classes, like Structured Products and Corporates. As yields and bond prices share a negative relation, it is expected that treasury prices may drop further.
Interestingly, a ripple effect was observed on many other financial markets and asset classes. Globally, government debt yields saw a spike. Australian bonds surged eight basis points, while U.K. bonds went up by five basis points. Yields from Japan also followed suit. Higher yields are also likely to make currency investment attractive for investors.
Market experts are also vigilant about the inflationary pressures, resulting from the rather bullish sentiments of investors. Demand boosted by the financial stimulus and investor confidence in the economy, are key signals of rising inflation prospects. Real yields accounting for inflation, although rising, still remain in the negative region. Investors are also worried by the possibility of the Fed dwindling down the stimulus, earlier than expected, further affecting bond yields.