US long-term interest rates hit their highest in a year due to the impact of the stimulus

Long-term US bond yields hit their highest level in a year in the latest sign that investors expect President Joe Biden’s stimulus package to boost US economic growth and ultimately lead to levels of higher inflation.

The 30-year Treasury yield briefly traded above 2% for the first time since last February on Monday, extending a rise that has seen it climb about 0.36 percentage points since the end of the month. ‘last year.

The surge in yields, which reflects a drop in the price of U.S. government debt, comes as the Biden administration presses congressional lawmakers to pass a sweeping $ 1.9 billion stimulus package. The injection would follow a $ 900 billion package adopted late last year and a $ 3 billion plan at the start of the pandemic.

Economists have repeatedly revised their growth forecasts upwards for this year in light of this huge government support, and additional funds are expected to push already high estimates even higher. Morgan Stanley now estimates that the US economy will grow 6.5% in 2021.

Combined with the unprecedented monetary policy measures launched during the crisis by the Federal Reserve, some investors believe that another aid package will lead to a more sustained rise in inflation – something the US central bank has struggled to achieve over the past decade.

“For me, it will be hard not to see inflation in something when we get what is likely to be a short-term stimulus,” said Jim Reid, analyst at Deutsche Bank. “Whether it will be in goods, wages, or asset prices (or all three) remains to be seen, but it seems inevitable that there will be an impact.”

A key measure of market inflation expectations, known as the 10-year break-even rate, rose to 2.2% on Monday – the highest level since 2014, according to Bloomberg data.

Still, an underlying barometer of consumer price inflation that excludes food and energy costs rose at an annual rate of just 1.6 percent in December, according to government statistics. The labor market also remains hampered by the coronavirus crisis, with around 10 million fewer people employed today than at the same time last year.

Jim O’Sullivan, chief U.S. macro strategist at TD Securities, said mounting evidence of widespread economic weakness makes it “virtually impossible” for the Fed to even consider cutting its ultra-accommodative monetary policy. in the short term, which contributes to buoy growth. “They must see further substantial progress,” he added.

Larry Summers, who served as Bill Clinton’s treasury secretary, warned last week that Biden’s plan could trigger “inflationary pressures of a kind we haven’t seen in a generation, with value implications. dollar and financial stability ”.

Janet Yellen, Secretary of the US Treasury, brushed aside those concerns in a television interview over the weekend, saying US policymakers should focus on strengthening the labor market.

“I have spent many years studying inflation and worrying about inflation. And I can tell you that we have the tools to deal with this risk if it does materialize, ”she said.

Expectations that the vaccine rollout, combined with economic stimulus measures, will help revive the U.S. economy have pushed long-term rates up faster than their short-term counterparts. The so-called yield curve, which measures this difference in yield, last week hit its strongest since 2015.

This trend is due to “positive news around the pandemic, better-than-expected economic data and increased expectations for a fiscal stimulus,” analysts at JPMorgan said on Friday.

The Wall Street investment bank predicted Congress would eventually agree to a $ 900 billion stimulus bill, but said recent Senate moves suggested the package could be bigger than expected.

“It stands to reason that if Congress passed a larger package, it would raise growth expectations, which would lead to Treasury yields higher than our baseline forecast,” the bank added.