US Treasurys have taken a hit from the Fed’s hawkish tone, but investors are a lot less worried about inflation in the long run

Bull and Bear sculptures outside the Frankfurt Stock Exchange in Frankfurt,
Bull and Bear sculptures outside the Frankfurt Stock Exchange in Frankfurt,

  • The Federal Reserve has shifted its outlook for interest rates and inflation and short-dated bonds have taken a hit.
  • The Fed’s predictions have hurt global equities and lifted shorter-term Treasury note yields.
  • Longer-dated yields have fallen sharply, showing investors are not worried about a sustained pickup in inflation.
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The US Treasury market is showing investors are preparing for a faster pickup in inflation and borrowing rates, after the Federal Reserve indicated last week it could raise interest rates sooner than previously expected, but they don’t expect that to last.

When the Fed said after its monetary policy meeting that it could raise rates by the end of 2023 in response to more robust economic growth and inflation, global equities sold off, along with other interest-rate sensitive assets such as commodities, and short-term Treasurys in particular, sending 2-year yields to their highest in well over a year.

But that same hawkishness has not played out across the whole of the Treasury market. Since Wednesday last week, the yield on the 30-year US Treasury bond has dropped by around 20 basis points to its lowest since February, reflecting a belief among investors that the Fed will likely be successful in warding off a damaging inflationary spike.

It was last at 2.064% at 9.23 am E.T. on Monday.

In contrast, yield on the two-year Treasury note has risen by around 13.5 basis points since the Fed’s announcement, bringing yield up to 0.27% as of the early hours of US trading on Monday – its highest since January. This has brought the gap, or spread, between 2-year and 30-year yields to its narrowest since February.

St Louis regional Fed President James Bullard added fuel to the trade. He said in an interview on Friday the central bank could even raise rates by the end of next year. He also confirmed the Fed was discussing winding down its asset-purchase program.

The two-year Treasury note is the most sensitive to shifts in interest rate expectations and Bullard’s comments prompted the yield to almost double at one point in the day on Friday, before subsiding somewhat.

The steeper drop in yields on longer-term Treasurys, however, indicates investors believe the Fed will be likely be successful in tempering inflation and that they do not believe markets will experience a series of aggressive rate increases in the long-term. Instead they seem to expect a slowdown in economic growth, coupled with low levels of inflation in the long-term – even if inflation levels should rise sharply in the immediate future, analysts said.

Equities at least could be for more pain, at least in the short term, according to Jeffrey Halley, senior market analyst at OANDA. “If it continues, we may see an overdue reckoning for some of the dumber investment decisions being made by investors searching for yield in a zero per cent world-high yield credit and SPACs for a start.” he said.

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Treasury yields rise to highest in 14 months as vaccinations accelerate and Biden prepares to unveil new spending plan

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S.,  June 2, 2017. REUTERS/Brendan McDermid
Traders work on the floor of the NYSE in New York.

  • The 10-year Treasury yield surpassed 1.7% on Tuesday, hitting a new 14-month high.
  • Investors are preparing for the government to issue more debt as President Biden reportedly seeks $4 trillion in infrastructure spending.
  • Technology stocks are lower as the 10-year marches higher.
  • See more stories on Insider’s business page.

Borrowing costs gauged by the 10-year Treasury yield hit a 14-month high Tuesday, with investors pricing in expectations of higher inflation and a stronger US economy as the government prepares to announce a new multi-trillion spending plan and more Americans receive COVID-19 vaccinations.

The 10-year yield marched up to 1.778% from 1.712% on Monday, extending this year’s fast-paced gain from about 0.9%. Alongside the gains have been pullbacks in technology shares that have largely surged in value since last March as investors sought exposure to companies that would fare well during extended pandemic-lockdown periods. Nasdaq-100 futures on Tuesday fell 0.8%.

The advance in the 10-year yield came as investors prepared for the unveiling by President Joe Biden of a $4 trillion infrastructure plan, potentially on Wednesday, according to the Washington Post. The price tag would include $3.5 trillion in tax hikes, the report said.

Such a pickup in spending would follow the $1.9 trillion fiscal stimulus package put into place earlier this month and more spending would lead the US government to seek more money to fund its plans.

“The prospect of higher debt issuance has seen the bond bears return lifting yields in the 10-year Treasury back above 1.70%,” and pushing up the US dollar, said Sophie Griffiths, a US and UK market analyst at Oanda, in a note.

While Washington and Wall Street gear up for more spending and higher consumer and producer prices, more Americans have been getting coronavirus vaccinations each day. Economists say a healthier population will lead to more businesses reopening and expanding their services. President Biden on Monday said 90% of Americans will be eligible for vaccinations by April 19.

While vaccinations are on the rise, so are new cases of COVID-19. Average daily cases are up about 15% in the past two weeks and average weekly hospitalizations have increased by 5%, the Centers for Disease Control and Prevention warned Monday.

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Bank stocks tumble as yields falling from 14-month high pause interest-income optimism

Wells Fargo ATM
A row of Wells Fargo ATMs.

  • Bank of America, Wells Fargo and other bank stocks fell Monday as the 10-year Treasury yield declined.
  • The closely watched yield tied to a range of lending programs fell about 5 basis points from a 14-month high.
  • The SPDR S&P Bank ETF lost 3% on Monday, marking a second straight loss.
  • See more stories on Insider’s business page.

Bank stocks dropped Monday, with a widely watched bank ETF pulling further away from a 13-year high as borrowing costs tracked by the 10-year Treasury yield edged lower.

Bank stocks in recent sessions have been gaining as the 10-year Treasury yield and other long-dated yields rise while investors price in expectations of stronger inflation as the economy recovers from the COVID-19 pandemic. Banks seeking to lend money can see interest income improve when long-dated yields rise.

The 10-year yield, which is tied to lending programs including mortgages and auto loans, fell Monday by nearly 5 basis points to 1.68% from 1.73% on Friday when it reached its highest since January 2020.

Shares of Bank of America declined 2.6%, Citigroup fell 1.4%, JPMorgan shares of JPMorgan Chase lost 3.3% Wells Fargo declined by 1.7%.

Those moves also contributed to pressure on the SPDR S&P Bank ETF on Monday. It slumped 3% to mark a second straight loss. The index fell on Friday after the Federal Reserve decided to let a rule expire that relaxed capital requirements to encourage bank lending during the COVID-19 crisis. The rule change for the supplementary leverage ratio, or SLR, will expire as scheduled on March 31.

With the recent run higher in bank stocks, the SPDR S&P Bank ETF on March 12 logged its highest settlement since September 2007.

Meanwhile, the 10-year yield has climbed from around 0.9% since the start of 2021.

“While such a percentage increase in yield is dramatic from a percentage point of view the likely reality is that the move in yields may suggest that ‘things’ are indeed ‘getting better’ and pointing toward re-openings in areas of the US economy that have been shuttered or near shuttered for much of the duration since the rise of the pandemic last year,” wrote John Stoltzfus, chief investment strategist at Oppenheimer Asset Management, in a note Monday.

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Investors pull $15 billion from bond funds as rising yields contribute to the biggest weekly outflows in a year

us cash
Rising yields have led to bond-fund outflows.

  • Weekly outflows from bond funds hit $15 billion, the highest amount in about a year, says tracker EPFR.
  • Rising Treasury yields have spurred flight from bond funds while bolstering equity funds.
  • The 10-year Treasury yield spiked beyond 1.6% on Friday.
  • See more stories on Insider’s business page.

A climb in long-dated Treasury yields stoked by US growth expectations has contributed to investors yanking more than $15 billion from bond funds this week, the largest outflow in a year, according to figures released Friday.

Borrowing costs are stepping higher as implied by the 10-year Treasury yield which is tied to a range of loan programs. The pickup in borrowing costs has put pressure on equities, particularly highly valued tech stocks, in recent sessions including on Friday. The 10-year yield was pushed up to 1.639%, its highest in more than a year and the Nasdaq Composite dropped 1.5%.

Yields have increased as investors price in a potential rise in inflation as the US economy recovers from the impact of the COVID-19 pandemic that threw it and other economies into recession last year.

Concerns about US bond yields was a factor in chasing more than $15 billion from bond funds during the week ended March 10, said EPFR, a subsidiary of Informa that provides data on fund flows and asset allocation. The latest outflow was the largest in nearly a year, it said in a note Friday. Bank of America, meanwhile, tallied bond outflows of $15.4 billion.

This week’s bond auctions included the sale of $38 billion in 10-year Treasuries. This week also marked the signing by President Joe Biden of a massive fiscal package under which $1,400 checks will be sent to most Americans.

“While the specter of another wave of US Treasuries hitting the market contributed to the growing angst about global borrowing costs,” wrote Cameron Brandt, director of research at EPFR, “the $1.9 trillion worth of stimulus they will be issued to finance added fresh fuel to the global reflation narrative.”

He said that narrative has “lit a fire” under equity flows. Equity funds tracked by EPFR raked in more than $20 billion for a fifth straight week. That keeps stock-fund inflows on track for a new quarterly record as year-to-date flows “moved within striking distance of the $240 billion mark,” said Brandt.

Brandt also said weekly bond outflows were spurred by the liquidation of funds linked to Greensill Capital, a UK-based supply chain finance company that filed for bankruptcy protection earlier this week.

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The Fed needs to convince stock investors that their rate hike expectations are priced in ‘too aggressively’, Barclays says

Federal Reserve
  • The Federal Reserve will hold its two-day meeting on March 16 and 17.
  • The Fed has work in relaying its message that pricing of rate-hike expectations is too aggressive, says Barclays.
  • Large-cap tech and growth stocks may continue to see underperformance, the bank’s head of US stock trading says.
  • Visit the Business section of Insider for more stories.

The Federal Reserve will likely keep working to convince equity investors that expectations are being priced in “too aggressively” for when the central bank will start raising interest rates and how fast those changes will occur, according to the US head of stock trading at Barclays.

The Fed’s two-day meeting starting on March 16 will be held at a time of notable rotations in equity markets, spurred in part the quick rise in borrowing rates this year as tracked by some Treasury yields. Yields have pushed higher in part as investors anticipate a rise in inflation as the US economy recovers from the COVID-19 health crisis.

As yields climb, so do expectations for when the Fed will start raising its benchmark interest rate which currently sits at a range of 0%-0.25%.

Growth in the world’s largest economy is a supportive factor for stocks, and rising rates to reflect growth “shouldn’t be a headwind for equities,” said Michael Lewis, head of US cash equities trading at Barclays, during the bank’s teleconference about inflation on Tuesday.

But “the velocity of the move in rates that we saw, or the rate of change in the move that we saw, spooked equity investors,” he said.

Lewis said he recalled at the start of 2021 seeing about 31.5 basis points of rate hikes priced into year-end 2023, “and then we went almost to above 90 in just a handful of weeks. That’s a massive move in terms of what people are expecting the Fed to do, what the market is pricing in,” he said. “And if you are going to get hikes to that degree and velocity and in that timeframe, that is negative for equities.”

However, “if you look at the dot-plot, there’s no liftoff expected through 2023, it’s in 2024,” he said. The dot-plot is the Fed’s way of signaling its interest-rate outlook.

“So the real job…is for the Fed to walk people off that cliff,” he said, adding that a lot of the central bank’s commentary so far “hasn’t been successful in convincing the markets that they are pricing in these expectations a little too aggressively.”

Lewis expects the Fed “will find a way to walk that back”, including discussing at next week’s meeting its preferred inflation measure, the PCE price index. That index “is a good 30 to 40 [basis points] lower” than the consumer price index. Also, the Fed can discuss near-term inflation versus longer-term inflation, he said.

Looking ahead, Lewis said he expects investors to continue to see large-cap tech and growth stocks underperform over the course of the next 12 to 18 months in favor of more cyclical-type stocks.

“But given the velocity and the rate of change that we’ve seen in the rates market …counterintuitively over the next week or two if you see a bounce in equity markets, it’s going to be led by growth and tech,” because of their recent and steep selloffs, he said.

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US growth prospects may overtake investor risk appetite as the biggest factor driving the dollar, says HSBC

US dollar bill
  • The US dollar surged after Friday’s jobs report that outstripped expectations.
  • The dollar’s jump indicates a “US exceptionalism” theme is growing in influence, says HSBC. 
  • HSBC said its work points to the potential of a floor under dollar selling is being formed. 
  • Visit the Business section of Insider for more stories.

The US dollar immediately jumped after Friday’s blowout US jobs report for February. HSBC says that the move suggests prospects for US economic growth — or a theme of “US exceptionalism” — rather than risk appetite, are beginning to gain influence over the direction of the greenback.  

Risk appetite, or RORO, — the investment bank’s shorthand for “risk on-risk off” — was the dominant influence over the dollar throughout 2020, leaving the safe-haven greenback down relative to other currencies. But the battle during 2021 has turned “finely balanced” following hints that the US exceptionalism theme that stokes dollar buying and strength appeared to be growing in sway. 

“One of the key aspects of the dollar is normally ‘the trend is your friend’. And, of course, if that trend is ebbing or that momentum is not what it used to be, it’s causing a little bit of head-scratching and maybe an identity crisis for the dollar as to what matters,” Daragh Maher, head of FX strategy at HSBC, told Insider, outlining the bank’s new method of tracking what’s driving the dollar.

“So what we tried to do is say, ‘Let’s be dispassionate and just see how the dollar is actually behaving. What is the FX market telling us?” he said. The new DRIVERS (Dollar Response In Various Economic Release Surprises) signal includes measuring the dollar’s price action for 60 seconds against seven other currencies after an upside data surprise then comparing that with a level recorded a minute before a data release.

“What you’re trying to catch is people’s reflex rather than their more measured assessment,” Maher said before the Labor Department on Friday released its monthly employment report.

Jobs climb, dollar leaps

The report showed the US economy added 379,000 jobs in February, trouncing expectations of 200,000 new jobs. 

“The USD rallied initially after stronger US employment data, suggesting the theme of US exceptionalism is becoming more influential,” HSBC said in a statement to Insider on Friday. 

The rally underscored RORO’s stalled momentum this year in guiding the dollar’s direction. RORO is built on the theme of global reflation and is characterized by broad selling and weakness in the dollar after strong US economic data.

“What’s going on is people are thinking, ‘Hey, the US economy is doing much better, which means the global economy must be doing much better. So I’m going to start buying some riskier assets, which means I don’t need to hold a safe haven like the dollar,'” Maher said.

RORO’s influence last year in weakening the dollar had risen so much that its hold on the greenback tightened to levels not seen since 2013, HSBC said in a March 1 research note. 

Separate from HSBC’s analysis, the widely watched US Dollar Index ended 2020 by sliding 13% from mid-March 2020. That month, the index hit a three-year high on surging demand for dollars as the pandemic accelerated. So far in 2021, the index has gained more than 2%.

But the dollar’s leap after Friday’s jobs reports highlighted that traders were reacting to greater optimism about US growth partly as the US government moves toward unleashing a $1.9 trillion fiscal stimulus package to combat the economic pain inflicted by the pandemic.

Growth prospects, in turn, can fuel speculation about the Federal Reserve’s next move on monetary policy. That perhaps “brings forward that taper conversation again. It brings forward people’s expectations of when US rates might go up,” said Maher. An interest rate hike by the Fed and tapering, or reducing, of the central bank’s bond purchases, could boost the dollar’s value and appeal.

To aid the economy through the coronavirus crisis, the Fed has kept its benchmark interest rate range at 0%-0.25% and has been buying $120 billion in bonds and mortgage-backed securities each month.

Maher said HSBC is not forecasting outright dollar strength this year. “What we’re suggesting is that this shift in relative influence will put a floor under dollar selling.”

The US exceptionalism theme took a brief hold over the dollar early in 2021 after some Fed officials indicated upside data surprises could lead to bond tapering this year. However, other Fed officials, including Fed Chairman Jerome Powell, pushed back against the taper talk.

“Over the next six months or so, we would expect to see some additional modest dollar weakens,” Maher said. “But as the US economy continues to recover — potentially boosted by additional fiscal stimulus – the narrative of Fed tapering and US exceptionalism is likely to become more influential towards the tail-end of this year.”

The DRIVERS signal tracks the dollar’s performance against the euro, the Japanese yen, the British pound, the Australian dollar, the Canadian dollar, the Swiss franc and the Mexican peso. HSBC tracks 30 data constituents of its US Economic Activity Surprise Index for DRIVERs.

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10-year Treasury yield climbs past key threshold, pulling tech stocks lower as investors reposition to sectors ‘better suited’ for economic reopening

Traders work on the floor of the New York Stock Exchange (NYSE) on December 07, 2018 in New York City
Traders work on the floor of the New York Stock Exchange (NYSE) on December 07, 2018 in New York City

  • The 10-year yield rose beyond 1.6% following a sharp rise in the number of jobs added in the US in February. 
  • The 10-year yield’s rise reflects that the US is preparing to exit a “horrible time in our economy,” says one analyst. 
  • The Nasdaq lost more ground Friday after Thursday’s selloff. 
  • Visit the Business section of Insider for more stories.

Borrowing costs as implied by the 10-year Treasury note’s yield rose Friday following a strong February jobs report, with the increase putting further pressure on technology stocks that have leapt in value during the COVID-19 health crisis.

The 10-year yield ran up to 1.614% after the Bureau of Labor Statistics said US businesses added 379,000 payrolls last month, smashing through expectations for the addition of 200,000 payrolls.

The yield has strengthened this week, with a move beyond 1.5% on Thursday sparking a selloff in equities. The Nasdaq on Friday dropped 1.3% during the session, with electric vehicle maker Tesla down 6%, Apple off by 1.4% and Amazon lower by 1.2%.

The Nasdaq on Thursday erased gains for the year from its February 12 record close. 

The 10-year yield, which influences a range of lending programs, has quickly climbed from about 1% at the start of 2021, which appears to reflect a faster-than-expected availability of COVID-19 vaccines to the public, Jamie Cox, managing partner for Harris Financial Group, told Insider.

“This time last year, a lot of people rotated out of sectors which were going to be most harmed by the pandemic and bought technology because technology was the one sector that was probably considered to be defensive for the first time ever,” said Cox. “So it makes perfect sense that you would see a selloff in technology to restore positions back in places that are going to be a little bit better suited now that the pandemic is largely behind us.”

The US economy is moving further toward fully reopening and that “should continue to push Treasury yields higher and will present a headwind to those sectors that did so well last year like Technology, Communication Services and, to a lesser extent, Consumer Discretionary (particularly because of Amazon),” wrote Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, in a Friday note.

“I regard the rise in yields not as some pretense of hyperinflation,” said Cox. “It’s just a recognition that we’re getting ready to exit a very horrible time in our economy and interest rates should reflect that,” he said, adding that he expects the 10-year yield to begin to moderate by May and not move much beyond where it is currently.

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Treasury yields spike to highest in over a year as investors weigh inflation concerns against recovery prospects

money
  • The 10-year yield zoomed past 1.5% on Thursday, reaching a level not seen since February 2020
  • The pace of the selloff in bonds has “increased severely” over the past few weeks, according to a fixed-income strategist.
  • The selloff comes as Congress is set to vote on a $1.9 trillion stimulus package 
  • Visit the Business section of Insider for more stories.

The yield on the US 10-year Treasury note surged to its highest in more than a year, with the rapid rise stoked by investors continuing to price in economic recovery expectations and related expectations for a pickup in inflation.

The 10-year yield hit as high as 1.545%, punching above 1.5% for the first time since February 21, 2020. The move came just a day after it pushed past 1.40%.

“It’s been a sharp selloff and what we’ve been talking about is how the pace of the selloff has increased severely over the last two or three weeks,” Scott Buchta, head of fixed income strategy at Brean Capital, told Insider on Thursday. Yields rise when bond prices fall.

“We’re probably going up into the 170s, 180s at this point,” in terms of the 10-year yield, he said.

Investors are seeing signs that the domestic and global economy are on course for growth this year after falling into recession in 2020 as the COVID-19 outbreak spread. This has fueled expectations for an increase in inflation.

The 10-year breakeven inflation rate, a gauge of the market’s inflation expectations, was at 2.17%. The breakeven rate is the difference in yield between 10-year Treasuries and 10-year Treasury Inflation-Protected Securities, or TIPS. That rate recently reached its highest level since 2014, according to Bloomberg data. 

One of the worries in the bond market is centered on the financial aid package that US lawmakers are expected to begin voting on during their session on Friday.

“How much stimulus can the market and the economy absorb?,” said Buchta. “There’s growing concern about the impact that additional supply could have on the market should Congress force through a $1.9 trillion stimulus package that may be too big for the economy and the markets to absorb.”

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Treasury yields spike to highest in over a year as investors weight inflation concerns against recovery prospects

money
  • The 10-year yield zoomed past 1.5% on Thursday, reaching a level not seen since February 2020
  • The pace of the selloff in bonds has “increased severely” over the past few weeks, according to a fixed-income strategist.
  • The selloff comes as Congress is set to vote on a $1.9 trillion stimulus package 
  • Visit the Business section of Insider for more stories.

The yield on the US 10-year Treasury note surged to its highest in more than a year, with the rapid rise stoked by investors continuing to price in economic recovery expectations and related expectations for a pickup in inflation.

The 10-year yield hit as high as 1.545%, punching above 1.5% for the first time since February 21, 2020. The move came just a day after it pushed past 1.40%.

“It’s been a sharp selloff and what we’ve been talking about is how the pace of the selloff has increased severely over the last two or three weeks,” Scott Buchta, head of fixed income strategy at Brean Capital, told Insider on Thursday. Yields rise when bond prices fall.

“We’re probably going up into the 170s, 180s at this point,” in terms of the 10-year yield, he said.

Investors are seeing signs that the domestic and global economy are on course for growth this year after falling into recession in 2020 as the COVID-19 outbreak spread. This has fueled expectations for an increase in inflation.

The 10-year breakeven inflation rate, a gauge of the market’s inflation expectations, was at 2.17%. The breakeven rate is the difference in yield between 10-year Treasuries and 10-year Treasury Inflation-Protected Securities, or TIPS. That rate recently reached its highest level since 2014, according to Bloomberg data. 

One of the worries in the bond market is centered on the financial aid package that US lawmakers are expected to begin voting on during their session on Friday.

“How much stimulus can the market and the economy absorb?,” said Buchta. “There’s growing concern about the impact that additional supply could have on the market should Congress force through a $1.9 trillion stimulus package that may be too big for the economy and the markets to absorb.”

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