(Bloomberg) – US Treasuries fell again on Wednesday, pushing long-term yields to their highest levels this week and pushing inflation expectations higher as traders continued to assess a faster economic rebound after the pandemic.
Yields on benchmark 10-year Treasuries jumped 10.3 basis points to 1.495%, a move reminiscent of last Thursday’s frightening sell-off of government debt. Meanwhile, a market indicator for the expected annual inflation rate for the next half-decade has exceeded 2.5% for the first time since 2008 – helped by rising oil prices. At least part of the trigger for the fixed income losses came from the UK, which has said it will sell more bonds than expected as its economy emerges from a deep recession.
Also in the background was Joe Biden’s announcement that enough doses of the virus vaccine should be available for every American adult by the end of May, and a report on Wednesday that the president would moderate some stimulus requests to try and win support for his anti-virus bill. . Rising yields have started to grab the attention of Federal Reserve officials, leaving all eyes on an appearance Thursday by President Jerome Powell.
Among other things, “the stimulus package is likely to pass and the economy is reopening,” said Michael Franzese, managing partner of MCAP LLC in New York City. “The battle is on between rates rising very quickly and a Federal Reserve trying to keep the market stable and may try to slow the momentum of reflation and economic rebound to something more manageable.”
Early ideas of inflation were evident in data from the Institute for Supply Management this week: Price paid measures hit their highest level since 2008.
A large trade in 10-year Treasury options on Wednesday and the accompanying sale of futures also fueled the surge in yields, as did the strong supply of corporate bonds.
The fixed income market has yet to fully assess the robust economic growth of the United States, which would imply a 10-year yield of around 1.90%, said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management at Horsham, Pennsylvania. This is the level last seen in January 2020, two months before pandemic fears began to trigger forced shutdowns in the United States.
Beyond the rise in nominal rates and the breakeven point, “the dynamic rise in the 10-year inflation-adjusted real return that we have seen is that the market is partly adjusting at a faster rate than expected. rate normalization by the Fed, ”he said.
The timing of the Fed’s first rate hike, known as the take-off, and subsequent rate hikes were not factored in, making Treasuries vulnerable to further liquidation in the weeks to come. come, according to Heppenstall.
(Add reference to Fed rate hikes in ninth paragraph.)
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