The recent surge in Treasury yields has investors wondering whether this time, the momentum will keep going.
After Pfizer Inc said its experimental COVID-19 vaccine was more than 90% effective early this week, investors rotated out of Treasuries and into sectors that could benefit from an economic upswing such as bank stocks and high-yield credit. That sent the benchmark 10-year yield to its highest since March, edging close to 1%, and the yield curve sharply steeper.
However, previous moves higher in yields have petered out as the Federal Reserve’s near-zero interest rate policy has kept Treasury trading in a tight range.
Some investors say this time may be different.
“This was the ‘vaccine’ moment the rates market had waited for,” said analysts at ING. The “big difference here from previous moves is that we won’t need to take this back.”
Higher Treasury yields can translate into higher borrowing costs and thus can slow growth albeit the boost can also help savers and retirees who may rely on fixed income.
Andrew Brenner, head of international fixed income at NatAlliance, said if people start getting vaccinated and COVID-19 case counts drop, “I would expect the Fed to start thinking about changing their 2023 outlook to 2022 or maybe even the last half of 2021 to start raising rates.”
The Eurodollar curve from 2022-2024, a proxy for the market’s expectation of rate hikes, surged on Monday, noted Michael Purves, head of Tallbacken Capital Advisors. That was striking, he said, as it suggested a vaccine “may in fact be much more important in disrupting the Fed’s ‘zero forever’ policy than fiscal stimulus might ever be.”
There is however some scepticism that linger. The possibility of gridlock in Washington that might hold up the passage of a stimulus bill. What’s more, it isn’t clear how long it might take for a vaccine to be approved by regulators and then rolled out.
“I still believe we are range-bound and will drift lower in yields over the next year,” said Scott Burg, chief investment officer at hedge fund Deer Park Road.
That was seen to some extent in derivatives trading on Monday with bets on the TLT exchange-traded fund, which tracks longer-dated Treasuries, according to Chris Murphy, co-head of derivative strategy at Susquehanna Investment Group.
There had been TLT bets “both ways” on Monday, he said, including a buyer of a call spread “looking for TLT higher and yields lower, saying that this is an over-reaction and things are not going to progress as quickly as the market is all of a sudden thinking.”
That was a contrast to last week, when traders pulled out of bearish bets that long-dated Treasury yields would rise, when it seemed clear Joe Biden had won the presidency but that his Democratic party would face a divided Congress. That drove volume in put options on TLT to the highest since June 2019 on Wednesday, according to data from options analytics provider Trade Alert.
The prospect of gridlock in Washington is one argument for little movement on fiscal policy, and therefore, little movement in U.S. Treasury yields, said Jack Ablin, chief investment officer at Cresset Wealth Advisors.
While a divided Congress is still likely to pass a coronavirus stimulus bill, investors say the amount may be smaller than was expected if there had been a broad Democratic victory.
“The election result seems like it will take between $1 trillion and $1.5 trillion out of fiscal stimulus. So that’s going to push pretty heavily on the Fed,” said Ablin.
Purves said the risk to the market is if Congress coalesces around a lower fiscal package thinking that a vaccine is around the corner, but ultimately vaccine news disappoints. That would make the rotation trade into more economically sensitive assets more vulnerable.
“Let’s see if we get follow-through on this rotation and Treasury sell-off,” said Purves. “We have our doubts.”
Reported by Kate Duguid
Sourced Reuters
For more Finance & Investment news follow i-invest Online.
- Unlock your ESG strategy with modern data architecture
Against a backdrop of new legal requirements, such as the EU Taxonomy, modern data architecture holds the key to a sustainable supply chain transformation, says Tim Srock, CEO of Lobster In recent years, companies have been facing growing pressure to implement sustainable business practices transparently and efficiently. This is now expected of data management. The… Read more: Unlock your ESG strategy with modern data architecture - Solve the AI sustainability conundrum and maximise operational efficiency
From streamlining ESG processes, to consuming vast amounts of energy, AI provides both opportunities and threats to the sustainability of industry. Julia Binder and José Parra Moyano of IMD unpack the issues Artificial intelligence is both a game-changer and a potential liability for business sustainability. On one hand, it offers transformative opportunities, optimising energy use,… Read more: Solve the AI sustainability conundrum and maximise operational efficiency - Period tracking apps promise convenience – but at what cost?
New research raises a number of ethical concerns and suggests users of apps to track menstrual cycles should be cautious Apps used to track menstrual cycles, monitoring periods and fertility windows are not as reliable as users may think they are, according to new research from Rotterdam School of Management Erasmus University (RSM). Such services,… Read more: Period tracking apps promise convenience – but at what cost? - Harness a new world of opportunity powered by Tech for Good
Those who embrace innovation today will shape the markets of tomorrow, building a future where efficiency, transparency, and purpose go hand in hand, says thought-leader Marga Hoek A new era of innovation is redefining sustainability, offering an unprecedented opportunity to tackle climate change, biodiversity loss, inequality, poverty, and global health challenges. As detailed in my… Read more: Harness a new world of opportunity powered by Tech for Good - Wellbeing initiative ‘Mind Your Business’ teams up with Danish Entrepreneurs
Durham University spinout Mind Your Business launches groundbreaking mental health entrepreneur support programme in Denmark Durham University spinout Mind Your Business has signed a major new partnership with Danish Entrepreneurs to deliver a nationwide mental health and business development programme across Denmark. Mind Your Business is a Durham-based enterprise that transforms business support by placing… Read more: Wellbeing initiative ‘Mind Your Business’ teams up with Danish Entrepreneurs