U.S. 10-Year Treasury Yield Hits 1% for First Time Since March -- 7th Update

By Sam Goldfarb and Joanne Chiu

The yield on the benchmark 10-year U.S. Treasury note rose above 1% for the first time since March on Wednesday, reflecting increased bets on additional fiscal stimulus after Georgia's runoff Senate elections.

The yield on the 10-year note settled at 1.041%, according to Tradeweb, up from 0.955% on Tuesday.

Yields, which rise when bond prices fall, started climbing Tuesday evening as early returns from Georgia's two elections showed promising signs for the Democratic candidates. The Associated Press called one race for Democrat Raphael Warnock at around 2 a.m. ET and the other race for Democrat Jon Ossoff later in the day, after normal trading hours.

Wins in both races effectively give Democrats 51 votes in the Senate -- when counting the tiebreaking vote of Vice President-elect Kamala Harris -- an outcome that many investors think could herald greater spending on pandemic-relief efforts and other Democratic priorities such as infrastructure projects. Democrats will also control the White House and the House of Representatives once President-elect Joe Biden is sworn in on Jan. 20.

Increased government spending without corresponding tax increases tends to push up Treasury yields partly because it portends more government borrowing and a larger supply of bonds. Depending on the type of spending, it can also drive yields higher by boosting economic growth and inflation and making it more likely that the Federal Reserve will raise short-term interest rates.

Long-term Treasury yields play a major role in the economy, helping set interest rates on everything from corporate bonds to mortgages. Over the past nine months, ultralow yields have simultaneously signaled skepticism about the economic recovery and helped bolster it by dragging down borrowing costs and pushing investors into riskier assets such as stocks and corporate debt.

The 10-year yield's recovery to 1%, after collapsing to record lows early in the pandemic, now reflects a brightening, though hardly spectacular, economic outlook.

Back in March, the yield on the 10-year Treasury note fell below 0.4% on an intraday basis as investors first came to grips with the full implications of the coronavirus crisis. In recent months, the yield has climbed as investors first anticipated and then responded to the approval of coronavirus vaccines, which many hope can tame the pandemic by the middle of the year. It also got a boost when Congress passed a $900 billion spending measure last month that was designed to support the economy until vaccines are more widely distributed.

Just how high yields rise from here could depend on what Democrats can do with a slim Senate majority.

In a Wednesday morning report, analysts at Jefferies LLC wrote that they now assume that Congress will pass another $1 trillion of fiscal stimulus over the next few months. That, they wrote, should add around 2 percentage points to economic growth over the next two years, causing the Fed to raise interest rates in early 2023 rather than in 2024 and creating a real risk of a big selloff in Treasurys.

Others were more cautious.

"This is a blue ripple not a blue wave," said Mark Dowding, chief investment officer at BlueBay Asset Management. The Democrats would need 53 Senate seats to pursue a more radical spending and policy agenda, but with only 50 or 51 seats President-elect Joe Biden would still face obstacles, he added.

One sign of improving investor sentiment is that expectations for annual increases in the consumer-price index over the next decade -- derived from the difference between nominal and inflation-protected Treasury yields -- climbed above 2% this week for the first time since 2018.

Two-percent is the Fed's long-term target for inflation, although the central bank focuses on a different gauge that typically runs below the consumer-price index.

Even before Tuesday's elections, some investors said they felt compelled to guard against the risk of higher inflation in case the combination of vaccines, government spending and central bank stimulus led to a bigger jump in economic growth than many economists have forecast.

Most investors, though, still aren't expecting rapid inflation, having lived through years of slow growth and tepid inflation in the decade following the 2008-2009 financial crisis.

In their view, several long-term structural factors -- such as an increase in global savings and aging populations in the developed world -- are likely to keep yields near their historic lows for the foreseeable future.

Fed officials also could help keep a lid on yields by holding short-term rates near zero and continuing to buy Treasurys across maturities. They could buy more long-term Treasurys if they think yields on those bonds are rising to the point that they are dragging on growth, investors and analysts said.

Other U.S. Treasurys apart from the 10-year note also sold off Wednesday, with the yield on the 30-year bond jumping to 1.819% from 1.705% Tuesday. Yields retraced a small amount of their gains in the early afternoon after supporters of President Trump stormed the Capitol Building, halting proceedings in both chambers of Congress.

In Europe, government bond yields were also broadly higher, with the German 10-year bund rising to minus-0.550% from minus-0.584% on Tuesday.

Higher Treasury yields means some investors are likely to be selling lower-yielding European debt to buy U.S. bonds and capture that extra income, said Peter Schaffrik, a global macro strategist at RBC Capital Markets.

--Paul J. Davies and Anna Hirtenstein contributed to this article.

Write to Sam Goldfarb at [e-mail] and Joanne Chiu at [e-mail]

(END) Dow Jones Newswires

01-06-21 1725ET