Long-term US bond yields have struck their highest level in a year in the latest sign that investors expect President Joe Biden’s stimulus plan will boost US economic growth and eventually lead to higher levels of inflation.
The 30-year Treasury yield briefly traded above 2 per cent for the first time since last February on Monday, extending a rise that has seen it climb around 0.36 percentage points since the end of last year.
The rise in yield, which reflects a decline in price of US government debt, comes as the Biden administration lobbies lawmakers in Congress to pass a sprawling $1.9tn stimulus package. The injection would follow a $900bn package passed late last year and a $3tn scheme at the start of the pandemic.
Economists have repeatedly revised up their growth forecasts for this year in light of this enormous government support, and the additional funds are likely to push already lofty estimates even higher. Morgan Stanley now reckons the US economy will expand 6.5 per cent in 2021.
Combined with the unprecedented monetary policy measures launched during the crisis by the Federal Reserve, some investors believe another aid programme will prompt a more sustained rise in inflation — something the US central bank has struggled to achieve over the past decade.
“For me it will be hard not to see inflation in something when we get what is likely to be a short-term stimulus boost,” said Jim Reid, analyst at Deutsche Bank. “Whether that will be in goods, wages or asset prices (or all three) remains to be seen but it seems inevitable there will be an impact.”
A key measure of market inflation expectations, known as the 10-year break-even rate, rose to 2.2 per cent on Monday — the highest level since 2014, according to Bloomberg data.
Still, an underlying barometer of consumer price inflation that excludes food and energy costs rose at an annual pace of just 1.6 per cent in December, according to government statistics. The labour market also remains hobbled by the coronavirus crisis, with roughly 10m fewer people employed now than at the same time last year.
Jim O’Sullivan, chief US macro strategist at TD Securities, said the mounting evidence of widespread economic weakness makes it “virtually impossible” for the Fed to even consider scaling back its ultra-accommodative monetary policy in the near-term, helping to further buoy growth. “They need to see substantial further progress,” he added.
Larry Summers, who served as Bill Clinton’s Treasury secretary, warned last week that Biden’s plan might trigger “inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability”.
Janet Yellen, US Treasury secretary, pushed back on these concerns in a television interview at the weekend, saying American policymakers should focus on shoring up the labour market.
“I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises,” she said.
Expectations that the vaccine rollout, combined with economic stimulus measures, will help lift the US economy have pushed longer-term rates up more quickly than their shorter-term counterparts. The so-called yield curve, which measures this difference in yields, last week hit its steepest since 2015.
This trend was due to “positive news around the pandemic, some better-than-anticipated economic data and increased fiscal stimulus expectation”, JPMorgan analysts said on Friday.
The Wall Street investment bank had been anticipating Congress would eventually agree a $900bn stimulus bill, but said recent manoeuvring in the Senate suggested the package could be larger than it had anticipated.
“It stands to reason that if Congress were to pass a larger package it would raise growth expectations, resulting in higher Treasury yields than our baseline forecasts,” the bank added.
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