Treasury yields kicked off the new year with a rise on Monday, with the 10-year rate touching the highest level in more than a month, as investors turned more optimistic that the latest surge of COVID-19 cases won’t inflict much damage on the global economy.
What are yields doing?
-
The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.618%
was at 1.628% at 3 p.m. Eastern, up from 1.496% on Friday afternoon, for its highest finish since Nov. 24, according to FactSet. Yields and debt prices move opposite of each other. -
The 2-year Treasury note yield
TMUBMUSD02Y,
0.773%
was 0.784%, compared with 0.73% on Friday afternoon. -
The 30-year Treasury bond yielded
TMUBMUSD30Y,
2.013%
2.016%, up from 1.888% on Friday. -
For all of 2021, the 10-year yield saw its largest annual rise since 2013, according to Dow Jones Market Data, while the 30-year yield posted the biggest rise since 2018 and the 2-year’s rise was the largest since 2017.
What’s driving the market?
Investors sold off Treasurys Monday on improved confidence that the latest wave of coronavirus cases, driven by the omicron variant, may be less harmful to the global economy than first feared.
Traders again priced in a better-than-50% chance that the first rate hike by the Federal Reserve will arrive in March.
While the rise in COVID-19-related hospitalizations is accelerating, with the daily average in the U.S. climbing above the 80,000 mark to a three-month high, studies show the omicron variant to be less severe than other variants, particularly as more people get vaccinated.
Over the past week, the average number of new U.S. cases has topped 400,000 for the first time, up more than 200% over the last 14 days, according to a New York Times tracker. Deaths have fallen by 3% over the same period.
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Dr. Anthony Fauci, the government’s top infectious disease doctor, said Sunday that the focus should be on the number of hospitalizations, which could overwhelm health systems, rather than new infections. Many infections are mild or asymptomatic and scientists think the omicron variant, while more infectious, may be less virulent than other variants. But other variants are also circulating.
Moreover, the risk of severe disease from any circulating variant, including omicron, is much, much higher for the unvaccinated, Fauci warned last week.
Data released on Monday included the final Markit manufacturing purchasing managers index reading for December, which was revised down to 57.7 from a 57.8 initial estimate. Meanwhile, construction spending was up 0.4% in November after a revised 0.4% rise in the prior month. December jobs figures will be this week’s data highlight, with official data due on Friday.
For all of 2021, yields posted some of their biggest annual gains in years as investors assessed a surge in inflation, fueled by strong consumer demand and exacerbated by supply-chain shortages, that proved stronger and more persistent than central bank policy makers had anticipated.
Meanwhile, the yield curve, a line tracking the differential in yields across Treasury maturities, flattened significantly in 2021. The spread between 10-year and 2-year Treasury yields had widened to more than 160 basis points in March of last year, before narrowing to less than 79 basis points by the end of the year, according to FactSet. A flattening curve can be a sign that investors fear that central bankers could move too aggressively, undercutting the economy.
What are analysts saying?
“One key aspect of Monday’s price action was that the bulk of the move in nominal yields was also reflected in [real, or inflation-adjusted, yields]; indicating the shift was more about an improving growth outlook rather than higher inflation concerns,” wrote Ian Lyngen and Ben Jeffery, analysts at BMO Capital Markets, in a note.
“Given that the Fed is poised to commence hiking this year, it follows that higher breakevens will become incrementally more difficult to achieve as any acceleration in the real economy not only cements the argument for higher outright yields, but it simultaneously increases the probability the Fed hikes sooner rather than later,” they wrote.