It has become more difficult for Wall Street to see US Treasury yields rise without feeling a little queasy.
After all, the Federal Reserve made cheap and abundant credit a key part of its pandemic response, with the result that major US corporations borrowed record amounts of debt at ultra-low rates last year to bolster their balance sheets during the crisis.
Low interest rates also helped create a record $ 4.3 trillion in US home loans in 2020, with refinancing reaching a record $ 2.8 trillion for the year as homeowners looked for 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 should come as no surprise that the financing costs of both corporate debt and the U.S. housing market have become a bit more expensive this year as long-term Treasury yields have gotten higher.
This CreditSights chart shows the return on 30-year Treasury bond TMUBMUSD30Y,
so far this year it has risen about 65 basis points to about 2.3%. That is close to the level of December 31, 2019, or before the first COVID-19 cases were detected in the US.
The interest on the treasury is rising.
CreditSights, Bloomberg
Return on 10-year Treasury bill TMUBMUSD10Y,
were about 68 basis points higher year-to-date Monday, close to 1.594%, according to Dow Jones Market Data.
But that’s still below the pre-pandemic 1.92% level of 10-year yields, which likely means the benchmark bond has even more room to rise, according to a CreditSights team led by senior analyst Erin Lyons.
Rising government bond yields were already reflected in rising 30-year fixed-rate mortgages, which averaged 3.02% last week, a level not seen since July.
Read: Mortgage rates rise above 3% – how high can they go before deterring homebuyers?
Companies are also rushing to borrow in the corporate bond market to get ahead of potentially higher interest rates, with the return of the ICE BofA US Corporate Index rising to around 2.2% at last check, from a recent low of 1.79 % in January.
Bank of America CorpBAC,
borrowed $ 5.5 billion in the investment-grade corporate bond market on Monday, with its longest 30-year debt yielding about 3.48%, according to a knowledgeable person.
But rising bond yields have also led to a stock rotation, pushing the technology-heavy Nasdaq Composite Index COMP,
in correction area on Monday, as defined by a decrease of at least 10%, but less than 20%, from the recent peak.
The Dow Jones Industrial Average DJIA,
ended Monday about 300 points higher, but shy of 32,000, as investors weigh the potential impact of an aggressive $ 1.9 trillion stimulus package from Congress on consumer spending patterns – and inflation – as the recovery picks up steam.
So how high can government bond yields go? “Given the current inflation forecast of 2.25% in the bond market (ie the 10-year break-even rate), there is still plenty of room to hike rates,” James Paulsen, chief investment strategist of The Leuthold Group, wrote in a note Monday. . .
“Our guess is that the 10-year return will still exceed 2% this year, but who really knows?”
Analysts point out that much will depend on whether the Fed is ultimately forced to change course with regard to its easy-money policy to combat sustained and persistent inflation above its targets, perhaps through reference interest rates above current levels of 0% to 0.25%. earlier than expected, or by phasing out the $ 120 billion monthly bond buying program that could drain the liquidity of financial markets.
“I think it is likely that the Fed will step in if yields on the 10-year US Treasury soar from here and create disordered markets,” Kristina Hooper, Invesco’s chief global market strategist, wrote in a note Monday.
But Hooper also does not expect inflation to become “problematic,” namely because of the significant slack in the labor market caused by the pandemic, and because of longer-term structural forces, including technological innovations, that are driving downward pressure on inflation.
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