Yields on the standard 10-year U.S. Treasury note reached 1% for the first time since March, after the yields from Georgia’s close-knit election betting fueled Democrats’ ability to gain close control of the Senate.
In the early afternoon in Hong Kong, the yield on the standard 10-year U.S. Treasury note, according to Tradeweb, was exactly 1,000%, up from 0.955% at the close of 15:00 ET on Tuesday.
Yields, which rise as bond prices fall, began to climb around 7:30 p.m. ET when early election yields began to seep in, showing extremely tight races but better-than-expected results for Democratic candidates.
Victories in both races will effectively give Democrats 51 votes in the Senate, if the outburst of Deputy President Kamala Harris is counted – a result that many investors say will be greater spending on pandemic relief and other Democratic priorities such as infrastructure projects. .
Increased government spending without corresponding tax increases tends to push up Treasury revenues, in part because it indicates more government lending and a greater supply of bonds. Depending on the type of spending, it can also increase returns by increasing economic growth and inflation and making it more likely that the Federal Reserve will raise short-term interest rates.
If the Democrats in Georgia win, ‘you effectively have your blue stock,’ “said Priya Misra, head of the world’s rate strategy at TD Securities in New York. While it would still be difficult for Democrats to pass comprehensive legislation, it would at least make it easier for Congress to pass popular measures such as improved unemployment benefits or larger stimulus payments, she said.
Long-term treasury returns play an important role in the economy and help set interest rates on everything from corporate bonds to mortgage lending. Over the past nine months, low returns have simultaneously shown skepticism about the economic recovery, helping to bolster it by lowering borrowing costs and driving investors to buy riskier assets such as equities and corporate debt.
The 10-year yield to 1%, after collapsing to a record low early in the pandemic, reflects an enlightening, but hardly spectacular, economic outlook.
In March, the yield on the 10-year treasury note on an intraday basis briefly dropped to 0.4% as investors first saw the full implications of the coronavirus crisis. For most of the summer, it remained stuck about two-thirds of a percentage point.
Yields have recently climbed further following the approval of coronavirus vaccines, which investors hope could tame the pandemic, as well as new legislation designed to support the economy until the vaccines become more widespread. They received a boost on Tuesday from surprisingly strong U.S. manufacturing data.
At the same time, yields remain low by historical standards. This is largely because investors have experienced a decade of slow growth and even lower inflation after the 2008-2009 financial crisis, which will temper their expectations of what the economy will look like even after it returns to normal.
One sign of improving investor sentiment is that expectations for annual inflation over the next decade, derived from the difference between nominal and inflation-protected treasury returns, climbed above 2% this week for the first time since 2018. The rate dropped as low as 0.5% in March.
—Joanne Chiu contributed to this article.
Write to Sam Goldfarb by [email protected]
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