The return on the benchmark’s 10-year US Treasury bill was 1% for the first time since March, after the return of the closely watched Georgia election sparked bets that Democrats could gain control of the Senate.
By early afternoon in Hong Kong on Wednesday, the yield on the 10-year US Treasury bond in the benchmark was exactly 1,000%, according to Tradeweb, up from 0.955% on Tuesday at 3 p.m. ET.
Yields, which rise as bond prices fall, started to climb around 7:30 p.m. ET as early election results poured in, with extremely tight races but better-than-expected results for the Democratic candidates.
Wins in both races would, in fact, earn the Democrats 51 votes in the Senate, if we include the casting vote of Vice President-elect Kamala Harris – an outcome that many investors believe would usher in a larger outlay on pandemic and other Democratic relief efforts. priorities, such as infrastructure projects. .
Higher government spending without corresponding tax increases tends to push up Treasury yields, in part because it predicts more government borrowing and a greater supply of bonds. Depending on the type of spending, it can also boost yields by boosting economic growth and inflation and making the Federal Reserve more likely to raise short-term interest rates.
If Democrats win in Georgia, “you basically have your blue swing,” said Priya Misra, head of global interest rate strategy at TD Securities in New York. While it would still be difficult for Democrats to pass sweeping legislation, it would at least make it easier for Congress to pass popular measures such as increased unemployment benefits or larger stimulus payments, she said.
Long-term Treasury yields play an important role in the economy, helping set interest rates on everything from corporate bonds to mortgages. Over the past nine months, ultra-low returns have simultaneously been a sign of skepticism about the economic recovery and helped amplify this by lowering borrowing costs and pushing investors to buy riskier assets such as stocks and corporate debt.
The 10-year yield rebound to 1%, after plunging to record lows at the start of the pandemic, reflects a bright, but hardly spectacular, economic outlook.
In March, the yield on the 10-year Treasury fell briefly below 0.4% on an intraday basis as investors first came to grips with the full implications of the coronavirus crisis. For most of the summer, it was stuck at about two-thirds of a percentage point.
Revenues had recently risen further following the approval of coronavirus vaccines, which investors hope can tame the pandemic, as well as new legislation designed to support the economy until vaccines become more widely distributed. They had been boosted on Tuesday from surprisingly strong US manufacturing data.
At the same time, yields remain historically low. That’s largely because after the 2008-2009 financial crisis, investors went through a decade of slow growth and even lukewarm inflation, pushing their expectations of what the economy will look like even after it returns to more normal levels.
A sign of improving investor sentiment is that expectations for annual inflation over the next decade, derived from the difference between nominal and inflation-protected government bond yields, rose above 2% this week for the first time since 2018. 0.5% in March.
—Joanne Chiu contributed to this article.
Write to Sam Goldfarb at [email protected]
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