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It has become more difficult for Wall Street to watch US Treasury yields go up without feeling a little uncomfortable.
After all, the Federal Reserve has made cheap and plentiful credit a key part of its response to the pandemic, with the result that large U.S. corporations borrowed a record amount of debt last year, at ultra-low rates. , to strengthen their balance sheets during the crisis.
Low rates also contributed to a record $ 4.3 trillion in residential mortgage loans in the United States in 2020, with refinancing for the year reaching an all-time high of $ 2.8 trillion. , as homeowners sought a break on their mortgage payments, according to a new Black Knight Report.
And as COVID-19 vaccinations accelerated under the Biden administration, it may not be surprising that borrowing costs in the U.S. corporate debt and housing markets have grown a bit higher. expensive this year as long-term treasury yields rose.
This CreditSights chart shows the yield of the 30-year Treasury TMUBMUSD30Y,
has risen from around 65 basis points so far this year to around 2.3%. This almost matches the level of December 31, 2019 or before the first cases of COVID-19 were detected in the United States
Treasury yields are climbing.
CreditSights, Bloomberg
Yields on the 10-year T-bill TMUBMUSD10Y,
were about 68 basis points higher since the start of the year Monday, nearly 1.594%, according to Dow Jones Market Data.
But it’s still below the pre-pandemic 1.92% level of the 10-year yield, which likely means the benchmark bond has even more wiggle room, according to a CreditSights team led by the senior analyst Erin Lyons.
Rising government bond yields have already translated into a rise in 30-year fixed-rate mortgages, which last week averaged 3.02%, a level not seen since July.
Read: Mortgage rates climb above 3% – how high can they go before scaring off buyers?
Companies have also rushed to borrow in the corporate bond market to get ahead of potentially higher rates, with the ICE BofA US Corporate Index yielding around 2.2% at last check, after a recent low of 1.79% in January.
Bank of America Corp. BAC,
borrowed $ 5.5 billion from the investment-grade corporate bond market on Monday, with its longest 30-year debt tranche returning about 3.48%, according to a person familiar with the transactions.
But rising bond yields also led to a turnover in stocks, which helped land the highly technological Nasdaq Composite Index COMP,
in correction territory Monday, as defined by a decline of at least 10%, but less than 20%, from its recent peak.
The Dow Jones Industrial Average DJIA,
finished about 300 points higher on Monday, but less than 32,000, as investors weighed the potential impact of an aggressive $ 1.9 trillion congressional stimulus package on consumer spending habits – and l inflation – as the recovery accelerates.
So how far can Treasury yields go? “Given the bond market’s current expectation of 2.25% inflation (the 10-year breakeven point), there is still plenty of room for yields to climb,” wrote James Paulsen, strategist. chief investment officer of the Leuthold Group, in a note Monday. .
“We think the 10-year yield will break through another 2% this year, but who really knows?”
Analysts stress that much will depend on whether the Fed ends up being forced to change course on its easy money policies to tackle persistent and sustainable inflation beyond its targets, perhaps by raising the benchmark rate above current level of 0% to 0.25%. sooner than expected, or by gradually reducing its bond buying program by $ 120 billion per month, which could drain liquidity from financial markets.
“I think it’s likely the Fed will act if the 10-year US Treasury yield rises quickly from here and creates messy markets,” wrote Kristina Hooper, chief global market strategist of Invesco, in a Monday note.
But Hooper also doesn’t expect inflation to become ‘problematic’, not least due to the considerable labor market downturn due to the pandemic, as well as longer-term structural forces, including innovations. technological developments, which will keep downward pressure on inflation.
Read more: Housing is a luxury? Here’s What K-Shaped Salvage Means For Real Estate
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