10-year U.S. Treasury yield hits 1% for first time since March

Yields, which rise when bond prices fall, began to climb around 7:30 p.m. EST, as early election returns began to pour in, showing extremely tight races but better than expected results. for Democratic candidates.

Wins in both races would effectively give Democrats 51 votes in the Senate, counting the decisive vote of Vice President-elect Kamala Harris – a result that many investors said would herald increased spending for the emergency relief efforts. pandemic and other democratic priorities such as infrastructure projects. .

Rising government spending without a corresponding increase in taxes tends to drive up Treasury yields in part because it portends more government borrowing and a greater supply of bonds. Depending on the type of spending, it can also drive up returns by boosting economic growth and inflation, and increasing the likelihood that the Federal Reserve will raise short-term interest rates.

If Democrats win in Georgia, “you do have your crush,” said Priya Misra, head of global rate strategy at TD Securities in New York. While it is still difficult for Democrats to pass radical legislation, it would at least make it easier for Congress to pass popular measures like improved unemployment benefits or larger stimulus payments, she said.

Long-term treasury bill yields play a major role in the economy, helping set interest rates on everything from corporate bonds to mortgages. Over the past nine months, ultra-low yields have simultaneously signaled skepticism about the economic recovery and helped strengthen it by lowering borrowing costs and pushing investors to buy riskier assets such as stocks. and corporate debt.

The rebound in the 10-year yield to 1%, after collapsing to record lows at the start of the pandemic, reflects an improving economic outlook, but hardly spectacular.

In March, the yield on the 10-year Treasury note briefly fell below 0.4% on an intraday basis as investors first understood the full implications of the coronavirus crisis. For much of the summer it was stuck at around two-thirds of a percentage point.

Yields have risen further recently following the approval of vaccines against the coronavirus, which investors hope they can tame the pandemic, as well as new legislation designed to support the economy until vaccines are more widely distributed. . They had received a boost on Tuesday thanks to surprisingly strong US manufacturing data.

At the same time, returns remain low by historical standards. This is largely because investors experienced a decade of slow growth and even lukewarm inflation after the 2008-2009 financial crisis, tempering their expectations of what the economy will look like even after its return to normal. more normal conditions.

One sign of improving investor sentiment is that annual inflation expectations over the next decade, derived from the difference between nominal yields and those on inflation-protected Treasuries, exceeded 2% this week. for the first time since 2018. This rate fell as low as 0.5% in March.

—Joanne Chiu contributed to this article.

Write to Sam Goldfarb at [email protected]