Bloomberg
Rising Treasury yields flash a warning sign
(Opinion of Bloomberg) – US government bond yields recorded some notable shifts in the first few days of 2021. Should they continue at their current pace, then it could cause the policymakers and equity investors headaches due to their underlying drivers. the Treasury’s yield curve had a significant increase in yields over two weeks over a longer period, or what is known in the financial markets as a ‘bear strengthening’. Yields on 10- and 30-year bonds increased by 20 basis points and 22 basis points, respectively, during this period. The spreads between the expiration dates and the two-year treasury bill, on which the Federal Reserve has a significant influence, have increased significantly – from 80 basis points to 98 basis points for the ten years and from 152 basis points to 174 basis points for the 30-year period. These steps come when Fed policy is constantly trying to significantly suppress yields and keep them in a tight trading band. If the move continues, they will also challenge the strong drivers of funds in equities and other risk assets by reducing their relative attractiveness and weakening the buy signals caused by models that include discounting future cash flows. In addition, their persistence will be of concern to the economic outlook due to their underlying drivers and the potential impact on sectors that are sensitive to interest rates such as housing. The recent shifts in the US yield curve do not reflect any change in the Fed’s extremely accommodative monetary policy stance, actually or forward-looking. In the minutes of the meeting of the Federal Open Market Committee of December, which were announced last week, it is reiterated that the central bank does not intend to lower its stimulus any time soon, and then the process will proceed extremely gradually. to higher returns, such as increased government default risk or more favorable growth prospects, are also unlikely to play a role. If anything, the Fed’s willingness to expand its balance sheet without limitation reinforces the idea that there is a steady and reliable non-commercial buyer of government bonds. Meanwhile, growth prospects have deteriorated in the shadow of the recent increase in infections, hospitalization and deaths associated with Covid-19. In the monthly report on U.S. jobs on Friday, a loss of 140,000 jobs was already reported in December. The Democratic battle over the two Senate elections in Georgia last week has raised the prospect of higher government budget deficits and much more debt financing. But because the Fed is not only committed to maintaining its large-scale asset purchases, but also to increasing them and shifting more of the purchases to longer-term securities, such a prospect should not have an immediate impact on returns. have not. then the expectations for higher inflation and more hesitation among buyers of the treasury. The former is supported by movements in inflationary equities and other inflation-sensitive market segments. The latter is consistent with the significant market rumor about how government bonds, which are so severely suppressed by the Fed and have an asymmetric outlook for yield movements, are no longer ideal for reducing risks. A sharpening of the recent movements in interest rate curves in the weeks ahead will be of concern to both policymakers and risk makers in markets. While the Fed is hoping for higher inflation, it does not want it to materialize through ‘stagflation’, that is to say even more disappointing growth and higher inflation. The Fed has few, if any, instruments to guide the economy out of such an operating environment. This, as well as the hit on corporate earnings due to the lack of economic growth, will exacerbate the extremely large gap between financial valuations and fundamental factors. The most dominant market view at the moment, and it is virtually universal, is that equities and other risk assets will continue to rise due to the abundant liquidity injections of central banks and the allocation of more private funds. After all, central banks show no tendency to moderate their enormous stimulus. And investors remain strongly conditioned by a powerful mix that has served them excellently so far: TINA (there is no alternative to stocks) which fueled BTD behavior (buy the dip) in response to even the smallest market sales, especially given FOMO ( the fear If the considerations are valid at the moment, it should also keep a close eye on the yield curve for US government bonds. or Bloomberg MP and its owners Mohamed A. El-Erian is a columnist for Bloomberg, president of Queens’ College, Cambridge, chief economic adviser at Allianz SE, the parent company of Pimco where he is CEO and co-CEO. Served as CIO and chairman of Gramercy Fund Management. His books include “The Only Game in Town” and “When Markets Collide.” For more articles like this, please visit us at blue mberg.com/opinion. Sign up now to stay ahead of the most trusted news source for business news. © 2021 Bloomberg LP